UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2022~~2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-37918

iRhythm Technologies, Inc.

(Exact Name of Registrant as Specified in its Charter)

_______________________________________________________________________

Delaware

20-8149544

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

699 8th Street Suite 600

San Francisco,

California

94103

(Address of Principal Executive Offices)

(Zip Code)

(415) 632-5700

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of April ~~29, 2022,~~24, 2023, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was ~~29,790,161.~~30,470,755.

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, Par Value ~~$.001~~$0.001 Per Share	IRTC	The Nasdaq Stock Market

IRHYTHM TECHNOLOGIES, INC.

TABLE OF CONTENTS


			Page No
PART I. FINANCIAL INFORMATION			1

Item 1. Financial Statements (Unaudited):			1
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations			2
Condensed Consolidated Statements of Comprehensive Loss			3
Condensed Consolidated Statements of Cash Flows			4
Condensed Consolidated Statements of Stockholders’ Equity			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2524
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			32

PART II. OTHER INFORMATION			3433

Item 1. Legal Proceedings			3433
Item 1A. Risk Factors			3433
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			6964
Item 3. Defaults Upon Senior Securities			6964
Item 4. Mine Safety Disclosures			6965
Item 5. Other Information			6965
Item 6. Exhibits			6965

Exhibit Index			7066

Signatures			7167

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Quarterly Report on Form 10-Q concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” ~~��seek,~~“seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

•the expected impact of macroeconomic conditions, including inflation, increasing interest rates, instability in the global banking system and volatile market conditions, and global events, including public health crises, such as the COVID-19 pandemic, and the ongoing military conflict between Russia and Ukraine, on our business, operations and financial results;

•the impact of supply chain disruptions on our operations and financial results;

•the impact of inflationary costs on our operations and financial results;

•plans to conduct further clinical ~~studies;~~studies, including any clinical trials initiated by third parties;

•our plans to modify our current systems and services, or identify and develop, or acquire, new products or ~~develop new products,~~services, to address additional indications;

•the expected growth of our business and our organization;

•our expectations regarding government and third-party payor coverage and ~~reimbursement;~~reimbursement or other regulatory actions or decisions;

•our expectations regarding the size of our sales organization and expansion of our sales and marketing efforts, including in international geographies;

•our expectations regarding revenue, cost of revenue, cost of service per device, operating expenses, including research and development expense, sales and marketing expense and general and administrative expenses;

•our ability to retain and recruit key personnel, including the continued development of a sales and marketing infrastructure;

•our ability to obtain and maintain intellectual property protection for our ~~products;~~systems and services;

•our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for, or ability to obtain, additional financing;

•our ~~ability to identify and develop new and planned products and acquire new products;~~

•~~our ability to remediate our material weaknesses over financial reporting;~~

•~~our~~ financial performance; and

•developments and projections relating to our competitors or our industry.

We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the ~~SEC~~Securities and Exchange Commission (the “SEC”) as exhibits to the Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

iii

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Balance Sheets

~~(Unaudited)~~(in thousands)

~~(In thousands, except share and per share data)~~


		March 31, 2022		December 31, 2021			March 31, 2023		December 31, 2022
(unaudited)						(unaudited)
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	94,786	$	127,562	Cash and cash equivalents	$	52,804	$	78,832
Short-term investments	Short-term investments	113,998		111,569		Short-term investments	123,533		134,312
Accounts receivable, net	Accounts receivable, net	55,286		46,430		Accounts receivable, net	49,557		49,918
Inventory	Inventory	12,446		10,268		Inventory	16,388		15,155
Prepaid expenses and other current assets	Prepaid expenses and other current assets	9,838		9,693		Prepaid expenses and other current assets	11,608		10,555
Total current assets	Total current assets	286,354		305,522		Total current assets	253,890		288,772
Property and equipment, net	Property and equipment, net	57,135		55,944		Property and equipment, net	82,208		75,670
Operating lease right-of-use assets	Operating lease right-of-use assets	65,256		84,587		Operating lease right-of-use assets	59,301		60,666
Goodwill	Goodwill	862		862		Goodwill	862		862
Other assets	Other assets	19,110		16,052		Other assets	25,440		22,252
Total assets	Total assets	$	428,717	$	462,967	Total assets	$	421,701	$	448,222
Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	5,413	$	10,509	Accounts payable	$	9,778	$	7,517
Accrued liabilities	Accrued liabilities	41,935		51,486		Accrued liabilities	54,607		65,497
Deferred revenue	Deferred revenue	2,933		3,049		Deferred revenue	3,486		3,051
Debt, current portion		—		11,667
Operating lease liabilities, current portion	Operating lease liabilities, current portion	11,501		11,142		Operating lease liabilities, current portion	14,032		13,031
Total current liabilities	Total current liabilities	61,782		87,853		Total current liabilities	81,903		89,096
Debt, noncurrent portion	Debt, noncurrent portion	34,917		9,690		Debt, noncurrent portion	34,939		34,935
Other noncurrent liabilities	Other noncurrent liabilities	832		697		Other noncurrent liabilities	1,013		1,307
Operating lease liabilities, noncurrent portion	Operating lease liabilities, noncurrent portion	86,344		85,212		Operating lease liabilities, noncurrent portion	82,012		83,072
Total liabilities	Total liabilities	183,875		183,452		Total liabilities	199,867		208,410
Commitments and contingencies (Note 7)		0		0
Commitments and contingencies (Note 8)						Commitments and contingencies (Note 8)
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding at March 31, 2022 and December 31, 2021		—		—
Common stock, $0.001 par value; 100,000,000 shares authorized; 29,768,718 shares at March 31, 2022 and 29,493,726 at December 31, 2021 issued and outstanding		27		27
Preferred stock, $0.001 par value - 5,000 shares authorized; none issued and outstanding at March 31, 2023 and December 31, 2022						Preferred stock, $0.001 par value - 5,000 shares authorized; none issued and outstanding at March 31, 2023 and December 31, 2022	—		—
Common stock, $0.001 par value - 100,000 shares authorized; 30,463 shares at March 31, 2023 and 30,193 at December 31, 2022 issued and outstanding						Common stock, $0.001 par value - 100,000 shares authorized; 30,463 shares at March 31, 2023 and 30,193 at December 31, 2022 issued and outstanding	30		28
Additional paid-in capital	Additional paid-in capital	701,822		685,594		Additional paid-in capital	783,182		762,380
Accumulated other comprehensive income		(353)		(61)
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(69)		(396)
Accumulated deficit	Accumulated deficit	(456,654)		(406,045)		Accumulated deficit	(561,309)		(522,200)
Total stockholders’ equity	Total stockholders’ equity	244,842		279,515		Total stockholders’ equity	221,834		239,812
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	428,717	$	462,967	Total liabilities and stockholders’ equity	$	421,701	$	448,222

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Operations

~~(Unaudited)~~

(Inin thousands, except ~~share and~~ per share data)

Three Months Ended
March 31,
2022 2021
Revenue, net $ 92,378 $ 74,311
Cost of revenue 30,619 23,458
Gross profit 61,759 50,853
Operating expenses:
Research and development 10,542 8,510
Selling, general and administrative 73,158 69,813
Impairment and restructuring charges 26,608 —
Total operating expenses 110,308 78,323
Loss from operations (48,549) (27,470)
Interest expense (2,029) (335)
Other income, net 16 124
Loss before income taxes (50,562) (27,681)
Income tax provision 47 98
Net loss $ (50,609) $ (27,779)
Net loss per common share, basic and diluted $ (1.71) $ (0.95)
Weighted-average shares, basic and diluted 29,596,325 29,164,430


	Three Months Ended March 31,
		2023		2022
(unaudited)
Revenue, net		$	111,436	$	92,378
Cost of revenue		35,755		30,619
Gross profit		75,681		61,759
Operating expenses:
Research and development		14,842		10,542
Selling, general and administrative		100,343		73,158
Impairment and restructuring charges		—		26,608
Total operating expenses		115,185		110,308
Loss from operations		(39,504)		(48,549)
Interest expense		(950)		(2,029)
Other income, net		1,432		16
Loss before income taxes		(39,022)		(50,562)
Income tax provision		87		47
Net loss		$	(39,109)	$	(50,609)
Net loss per common share, basic and diluted		$	(1.29)	$	(1.71)
Weighted-average shares, basic and diluted		30,297		29,596

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Comprehensive Loss

~~(Unaudited)~~(in thousands)

~~(In thousands)~~

Three Months Ended
March 31,
2022 2021
Net loss $ (50,609) $ (27,779)
Other comprehensive income:
Net change in unrealized gains on available-for-sale securities (292) 1
Comprehensive loss $ (50,901) $ (27,778)


	Three Months Ended March 31,
		2023		2022
(unaudited)
Net loss		$	(39,109)	$	(50,609)
Other comprehensive income (loss):
Net change in unrealized gain (loss) on short-term investments		327		(292)
Comprehensive loss		$	(38,782)	$	(50,901)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statements of Cash Flows

~~(Unaudited)~~

(Inin thousands)
Three Months Ended March 31,
2022 2021
Cash flows from operating activities
Net loss $ (50,609) $ (27,779)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,143 2,036
Stock-based compensation 13,903 20,230
Accretion of discounts on investments, net and other 432 498
Provision for doubtful accounts and contractual allowances 14,022 9,768
Amortization of operating lease right-of-use assets 6,547 1,555
Impairment charges 23,164 —
Changes in operating assets and liabilities:
Accounts receivable (22,878) (39,818)
Inventory (2,377) (1,608)
Prepaid expenses and other current assets (146) 387
Other assets (3,058) (775)
Accounts payable (5,308) 673
Accrued liabilities (9,429) (6,140)
Deferred revenue (116) 495
Operating lease liabilities (6,175) (1,364)
Net cash used in operating activities (38,885) (41,842)
Cash flows from investing activities
Purchases of property and equipment (5,572) (4,211)
Purchases of available-for-sale investments (45,974) (30,054)
Sales of available-for-sale investments 15,019 —
Maturities of available-for-sale investments 28,000 151,300
Net cash provided by (used in) investing activities (8,527) 117,035
Cash flows from financing activities
Payment of long-term debt (21,389) (2,917)
Proceeds from term loan 35,000 —
Proceeds from issuance of common stock in connection with employee equity incentive plans 1,076 1,576
Tax withholding upon vesting of restricted stock awards — (25,105)
Payments of issuance costs for long term debt (51) —
Net cash provided by (used in) financing activities 14,636 (26,446)
Net (decrease) increase in cash and cash equivalents (32,776) 48,747
Cash and cash equivalents beginning of period 127,562 88,628
Cash and cash equivalents end of period $ 94,786 $ 137,375
Supplemental disclosures of cash flow information
Interest paid $ 1,967 $ 331
Non-cash investing and financing activities
Property and equipment costs included in accounts payable and accrued liabilities $ 225 $ 115
Right-of-use assets obtained in exchange for operating lease liabilities $ 7,666 $ 5,757
Capitalized stock-based compensation $ 1,250 $ 911


	Three Months Ended March 31,
	2023		2022
(unaudited)
Cash flows from operating activities
Net loss	$	(39,109)	$	(50,609)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	3,576		3,143
Stock-based compensation	18,251		13,903
Amortization of premium and accretion of discounts on investments, net	(1,137)		432
Provision for doubtful accounts and contractual allowances	21,425		14,022
Amortization of operating lease right-of-use assets	1,365		6,547
Impairment charges	—		23,164
Other	176		—
Changes in operating assets and liabilities:
Accounts receivable	(21,064)		(22,878)
Inventory	(1,404)		(2,377)
Prepaid expenses and other current assets	(1,053)		(146)
Other assets	(3,189)		(3,058)
Accounts payable	2,262		(5,308)
Accrued liabilities	(11,228)		(9,429)
Deferred revenue	435		(116)
Operating lease liabilities	(59)		(6,175)

Net cash used in operating activities	(30,753)		(38,885)
Cash flows from investing activities
Purchases of property and equipment	(8,423)		(5,572)
Purchases of short-term investments	(33,757)		(45,974)
Sales of short-term investments	—		15,019
Maturities of short-term investments	46,000		28,000
Net cash provided by (used in) investing activities	3,820		(8,527)
Cash flows from financing activities
Payment of loans	—		(21,389)
Proceeds from term loan	—		35,000
Proceeds from issuance of common stock in connection with employee equity incentive plans	905		1,076
Payments of issuance costs for long-term debt	—		(51)
Net cash provided by financing activities	905		14,636
Net decrease in cash and cash equivalents	(26,028)		(32,776)
Cash and cash equivalents, beginning of period	78,832		127,562
Cash and cash equivalents, end of period	$	52,804	$	94,786
Supplemental disclosures of cash flow information:
Interest paid	$	678	$	1,967
Cash taxes paid	$	8	$	—
Cash received from tenant improvement allowances	$	1,603	$	—
Non-cash investing and financing activities:
Property and equipment costs included in accounts payable and accrued liabilities	$	203	$	225
Right-of-use assets obtained in exchange for operating lease liabilities	$	—	$	7,666
Capitalized stock-based compensation	$	1,648	$	1,250

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

IRHYTHM TECHNOLOGIES, INC.

Condensed Consolidated Statement of Stockholders’ Equity

~~(Unaudited)~~

(~~In thousands, except share data)~~

Common Stock Accumulated Other Total
Shares Amount Additional Paid-In Capital Accumulated Deficit Comprehensive Income Stockholders' Equity
Balances at December 31, 2020 29,019,350 $ 27 $ 646,258 $ (304,684) $ 11 $ 341,612
Issuance of common stock in connection with employee equity incentive plans, net 268,399 — 1,576 — — 1,576
Tax withholding upon vesting of restricted stock awards — — (25,105) — — (25,105)
Stock-based compensation expense — — 19,267 — — 19,267
Net loss — — — (27,779) — (27,779)
Net change in unrealized gain on investments — — — — 1 1
Balances at March 31, 2021 29,287,749 $ 27 $ 641,996 $ (332,463) $ 12 $ 309,572

Common Stock Accumulated Other Total
Shares Amount Additional Paid-In Capital Accumulated Deficit Comprehensive Income Stockholders' Equity
Balances at December 31, 2021 29,493,726 $ 27 $ 685,594 $ (406,045) $ (61) $ 279,515
Issuance of common stock in connection with employee equity incentive plans, net 274,982 — 1,076 — — 1,076
Tax withholding upon vesting of restricted stock awards — — — — — —
Stock-based compensation expense — — 15,152 — — 15,152
Net loss — — — (50,609) — (50,609)
Net change in unrealized gain on investments — — — — (292) (292)
Balances at March 31, 2022 29,768,708 $ 27 $ 701,822 $ (456,654) $ (353) $ 244,842
in thousands)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Shares	Amount
(unaudited)
Balances as of December 31, 2022	30,193	$	28	$	762,380	$	(522,200)	$	(396)	$	239,812
Issuance of common stock in connection with employee equity incentive plans, net	270	2		903		—		—		905
Stock-based compensation	—	—		19,899		—		—		19,899
Net loss	—	—		—		(39,109)		—		(39,109)
Net change in unrealized gain on short-term investments	—	—		—		—		327		327
Balances as of March 31, 2023	30,463	$	30	$	783,182	$	(561,309)	$	(69)	$	221,834


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Shares	Amount
(unaudited)
Balances as of December 31, 2021	29,494	$	27	$	685,594	$	(406,045)	$	(61)	$	279,515
Issuance of common stock in connection with employee equity incentive plans, net	275	—		1,076		—		—		1,076
Stock-based compensation	—	—		15,152		—		—		15,152
Net loss	—	—		—		(50,609)		—		(50,609)
Net change in unrealized loss on short-term investments	—	—		—		—		(292)		(292)
Balances as of March 31, 2022	29,769	$	27	$	701,822	$	(456,654)	$	(353)	$	244,842

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

1. ~~Organization and Description of Business~~ORGANIZATION AND DESCRIPTION OF BUSINESS

iRhythm Technologies, Inc. (the “Company”) was incorporated in the state of Delaware in September 2006. The Company is a leading digital healthcare company ~~redefining~~that creates trusted solutions that detect, predict, and prevent disease. The Company's principal business is the ~~way~~design, development, and commercialization of device-based technology to provide remote cardiac monitoring services that it believes allow clinicians to diagnose certain arrhythmias ~~are clinically diagnosed by combining wearable biosensing technology~~quicker and with ~~cloud-based data analytics and deep-learning capabilities. The Company began commercial operations in the United States in 2008 following~~greater efficiency than other services that rely on traditional technology.

Since first receiving clearance byfrom the U.S. Food and Drug ~~Administration.~~Administration (“FDA”) for the Company's technology in 2009, the Company has supported physician and patient use of its technology and provided remote cardiac monitoring services from its Medicare-enrolled independent diagnostic testing facilities (“IDTFs”) and its qualified technicians. The Company has provided the Zio remote cardiac monitoring services, including extended Holter, traditional Holter, and mobile cardiac telemetry (“MCT”) monitoring services (“Zio Services”), using the Zio Systems.

The Company is headquartered in San Francisco, California, which also serves as a clinical center. The Company has additional clinical centers in ~~Lincolnshire,~~Deerfield, Illinois and Houston, Texas and a manufacturing facility in Cypress, California. ~~In March 2016, the~~The Company formed a wholly-owned ~~subsidiary~~subsidiaries in the United ~~Kingdom. Additionally,~~Kingdom in March 2016, in Singapore in June 2021, ~~the Company formed a wholly-owned subsidiary~~ in ~~Singapore. The Company manages its operations as a single operating segment. Substantially all of the Company’s assets are maintained~~Japan in June 2022 and in the ~~United States. The Company derives substantially all of its revenue from the provision of services to customers~~Philippines in ~~the United States.~~February 2023.

2. ~~Summary of Significant Accounting Policies~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“~~U.S.~~ GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the ~~"SEC"~~“SEC”) regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the balance sheet as of ~~December~~March 31, ~~2021,~~2023, and related disclosures, have been derived from the audited consolidated financial statements at that date but do not include all of the information required by GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair statement of the Company’s unaudited condensed consolidated financial information. The results of operations for the three months ended March 31, ~~2022,~~2023, are not necessarily indicative of the results to be expected for the year ending December 31, ~~2022,~~2023, or for any other interim period or for any other future year.

The accompanying ~~interim~~ unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, ~~2021,~~2022, included in the Company’s ~~annual report~~Annual Report on Form 10-K, filed with the SEC on February ~~28, 2022.~~23, 2023.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Risks and Uncertainties

Macroeconomic Factors and Supply Chain Constraints

The Company’s operations and performance may vary based on worldwide economic and political conditions, which have been adversely impacted by continued global economic uncertainty, political instability, and military hostilities in multiple geographies, including the COVID-19

As pandemic, the ongoing military conflict between Russia and Ukraine, domestic and global inflationary trends, rising interest rates, instability in the global banking system, global supply shortages, and a tightening labor market. For example, the Company has experienced staff shortages at its contact centers as a result of the COVID-19 pandemic and federal, state and local responses thereto. A severe or prolonged economic downturn or period of global political instability could drive hospitals and other healthcare professionals to tighten budgets and curtail spending, which could in turn negatively impact rates at which physicians prescribe the ~~Company has experienced significant business disruptions, restrictions on its~~Company’s Zio Services. In addition, higher unemployment rates or reductions in employer-provided benefits plans could result in fewer commercially insured patients, resulting in a reduction in the Company’s margins and impairing the ability of uninsured patients to make timely payments. A weak or declining economy could also strain the Company’s suppliers, possibly resulting in supply delays and disruptions. There is also a risk that one or more of the Company’s current service providers, suppliers, or other partners may not survive such difficult economic times, which could directly affect the Company’s ability to ~~travel, reduction in access to customers due to diverted resources at hospitals, slower response times from payors who are also facing business interruptions,~~attain its goals on schedule and ~~shortened business hours as governments instituted prolonged shelter-in-place and/~~on budget. If the current equity and credit markets deteriorate, it may make any necessary debt or ~~self-quarantine mandates.~~

~~Government mandates related to~~equity financing more difficult, more costly, and more dilutive. The Company cannot predict the ~~COVID-19 pandemic have impacted, and are expected to continue to impact, Company personnel and personnel at third-party manufacturing facilities~~timing, strength, or duration of an economic downturn, instability, or recovery, whether worldwide, in the United States, ~~and other countries, and the availability~~ or ~~cost of materials, which could disrupt our supply chain and reduce margins. While the Company has continued to deliver~~within its Zio service by operating with remote employees and essential employees on site, an extended implementation of these government mandates could further impact the Company's ability to provide its Zio service effectively, and could impede the progress of all ongoing initiatives. Appropriate social distancing techniques and other measures at the Company's facilities have been implemented for employees who are required by job scope or who have chosen to return to the Company’s facilities.

Government mandates related to the COVID-19 pandemic have impacted our claims and appeals and are expected to continue to impact payor processing times. This increase in response times may be due, in part, to staffing shortages at the payors.

industry.

The ~~Company's~~Company’s remote work arrangements resulting from the COVID-19 pandemic and subsequent decision to pursue a sublease for its San Francisco headquarters resulted in an impairment of its right of use asset and related leasehold

~~IRHYTHM TECHNOLOGIES, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)~~

improvements and furniture during the three months ended March 31, 2022, and the Company ~~expects~~may incur additional impairment charges related to real property lease ~~agreements may be incurred.~~

agreements.

The Company is continuously reviewing its liquidity and anticipated capital ~~requirements in light of the significant uncertainty created by the COVID-19 pandemic.~~requirements. The Company believes it will have adequate liquidity over the next 12 months to operate its business and to meet its cash requirements. As of March 31, ~~2022,~~2023, the Company is in compliance with its debt covenants.

Reimbursement

The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. This impact is having a material, adverse impact on liquidity, capital resources, supply chain, operations and business and those of the third parties on which the Company relies, and could worsen over time. The extent to which the COVID-19 pandemic impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions to contain the COVID-19 pandemic or treat its impact, among others. The full extent of potential delays or impacts on the business, financial condition, cash flows and results of operations remains unknown.

~~Reimbursement~~

~~Government payors may change their coverage and reimbursement policies, and payment amounts, in a way that would prevent or limit reimbursement~~receives revenue for the Zio ~~service,~~Services primarily from third-party payors, which ~~would significantly harm~~include commercial payors and government agencies, such as the ~~Company. Government and other third-party~~Centers for Medicare & Medicaid Services (“CMS”). Third-party payors require the Company to ~~report~~identify the service for which it is seeking reimbursement by using a Current Procedural Terminology (“CPT”)~~, a code-set~~ code set maintained by the American Medical ~~Association (“AMA”). For Zio XT, the Company had historically utilized temporary~~Associations. These CPT codes ~~(or Category III CPT codes) used~~are subject to periodic change and update, which will impact the reimbursement rates for ~~newly introduced technologies and specific to our category of~~the Company’s Zio Services.

CMS updates the reimbursement rates for diagnostic ~~monitoring. The process to convert Category III CPT codes to Category I CPT codes is governed~~tests performed by IDTFs annually via the AMA and Centers for Medicare and Medicaid (“CMS”). On October 25, 2019, the AMA’s CPT Editorial Panel established two new Category I CPT codes that are applicable to the Zio service and took effect on January 1, 2021. In November 2021, CMS published the Calendar Year 2022 Medicare Physician Fee Schedule, ~~Final Rule (the “2022 Final Rule”). In the Final Rule,~~and effective January 1, 2023, CMS ~~did not issue~~established national ~~pricing and continued carrier pricing~~payment rates for the ~~calendar year 2022 on Category I~~ CPT codes ~~93241,~~the Company uses to report the long-term Holter monitoring services it performs with its Zio XT System: CPT codes 93247 (for wear-time of greater than 7 days and up to 15 days) and 93243 ~~93245~~(for wear-time of greater than 48 hours and up to 7 days). Based on the relative value units CMS assigned to CPT codes 93247 and 93243, the national reimbursement rates for ~~extended external ECG monitoring, the relevant codes~~these services in 2023 are $243.65 and $231.79, respectively, and range from $247.59 to $334.46 and $235.54 to $318.17 for the Company’s Medicare-enrolled IDTF locations in Deerfield, Illinois, Houston, Texas, and San Francisco, California, when considering the geographic practice cost index for these locations. Because remote cardiac monitoring technology, including the Zio ~~XT service. CMS designated these codes for contractor pricing in calendar 2022, which means~~System, are rapidly evolving, there is a continuing risk that ~~prices will be determined regionally by each Medicare Administrative Contractor (“MAC” or “MACs”).~~

~~Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through a national coverage determination (“NCD”)~~relative value units assigned, and reimbursement rates set, by CMS ~~or at~~may not adequately reflect the ~~local level through a local coverage determination (“LCD”), by one or more~~value and expense of ~~the regional Medicare Administrative Contractors (“MACs”) who are private contractors that process~~this technology and ~~pay claims on behalf of CMS for different regions. In the absence of a specific NCD, as is the case with Zio XT historically~~related monitoring services, and for Calendar Year 2022 following the Final Rule, the MAC with jurisdiction over a specific geographic region will have the discretion to make an LCD. The Company is seeking to establish LCD pricing with one or more MACs for 2022 and will be subject to LCD pricing until CMS establishes a NCD.

In January 2022, Novitas Solutions, the MAC which covers the region where our Independent Diagnostic Testing Facility (“IDTF”) in Houston, Texas is located, updated reimbursement rates for CPT codes 93243 and 93247 for the Houston jurisdiction to $223 and $233, respectively. These updated rates are retroactive to January 1, 2022. These rates were higher than the rates posted by Novitas in 2021 but continue to be significantly below our historical Medicare rates for our Zio XT service. In April 2022, National Government Services ("NGS"), the MAC which covers the region where our IDTF in Lincolnshire, Illinois is located, updated reimbursement rates for CPT codes 93243 and 93247 for the Suburban Chicago jurisdiction to $334 and $347, respectively. These updated rates are retroactive to April 1, 2022 and are higher than our historical Medicare rates for our Zio XT service.~~We are continuing to negotiate with MACs to establish higher pricing for the Category I CPT Codes but can offer no assurances as to the timing or outcome of those discussions.~~

Further, a reduction in coverage by Medicare could cause some commercial third-party payors to implement similar reductions in their coverage or level of reimbursement of the Zio service. Given the evolving nature of the healthcare industry and on-going healthcare cost reforms, the Company cannot provide certainty that CMS will ~~continue to be subject to changes~~not reduce these rates in the ~~level of Medicare coverage for its products, and unfavorable coverage determinations at the national or local level could~~future, which would adversely affect ~~its results of operations. Although a large majority of commercial customers have re-contracted~~ the Zio XT service since the establishment of the Category I codes on January 1, 2021, matching pre-existing rates, if the Company is unsuccessful in improving the Medicare rates, the Company believes that commercial rates may begin to be more negatively impacted next year.Company’s financial results.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

If the Company is unable to achieve a level of revenues adequate to support its cost structure or is unable to reduce its overall cost structure, this could raise substantial doubts about the Company's ability to continue as a going concern.

~~Supply Chain Constraints~~

Economies worldwide have also seen other indirect COVID-19 pandemic related disruptions, including supply chain impacts, material inflation, and labor constraints in certain markets and geographies. Such economic disruption has had an adverse effect on the Company's business environment as increased lead times and component shortages have resulted in higher inventory costs. While the Company has increased inventory safety stock levels to help mitigate the delays and disruptions in supply, the Company cannot be certain that any prolonged, intensified, or worsened effect from the COVID-19 pandemic would not further impact its supply chain.

Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the ~~reporting period.~~periods presented. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, contractual allowances, allowance for doubtful accounts, the useful lives of property and equipment, the recoverability of long-lived assets including the estimated usage of the printed circuit board assemblies (“PCBAs”), the incremental borrowing rate for operating leases, accounting for income taxes, impairment of right-of-use ("ROU") assets, ~~("ROU assets"),~~ and various inputs used in estimating stock-based compensation. Certain of these estimates are impacted by uncertainties surrounding COVID-19 such as revenue recognition, contractual allowances for revenue, allowance for doubtful accounts, and stock-based compensation. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that management believes are reasonable under the circumstances, including assumptions as to future events. Actual results may differ from those estimates.

~~For further details on estimates used to calculate the impairment on ROU assets, see~~ ~~Note 6. Impairment and Restructuring Charges.~~

~~Impairment of Long-Lived Assets~~

The Company annually reviews long-lived assets for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset.

Any impairments to right of use assets, leasehold improvements, or other assets as a result of a sublease or other similar action are initially recognized when a decision to take such action is made and recorded as an operating expense. Similar to other long-lived assets, management tests ROU assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. For ROU assets, such circumstances may include subleases that do not fully recover the costs of the associated leases or commitments to sublease a property. For the three months ended March 31, 2022, the Company recorded $23.2 million of long-lived asset impairment charges in the consolidated statement of operations. See Note 6. ~~Impairment and Restructuring Charges.~~

Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowances

Accounts receivable includes amounts due to the Company from healthcare institutions, third-party payors, and government payors and their related patients, ~~due to~~as a result of the Company's normal business activities. Accounts receivable is reported on the unaudited condensed consolidated balance sheets net of an estimated allowance for doubtful accounts and contractual allowances.

The Company establishes an allowance for doubtful accounts for estimated uncollectible receivables based on its assessment of the collectability of customer accounts and recognizes the provision as a component of selling, general and administrative expenses. The Company records a provision for contractual allowances based on the estimated differences between contracted amounts and expected collection rates. Such provisions are based on the Company's historical experience and are reported as a reduction of revenue.

The Company regularly reviews the allowances by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.

The following table presents the changes in the allowance for doubtful accounts (in thousands):


	Three Months Ended March 31, 2023		Year Ended December 31, 2022		Three Months Ended March 31, 2022
Balance, beginning of period	$	18,475	$	14,012	$	14,012
Add: provision for doubtful accounts	5,326		17,191		4,413
Less: write-offs, net of recoveries and other adjustments	(4,726)		(12,728)		(60)
Balance, end of period	$	19,075	$	18,475	$	18,365

The following table presents the changes in the contractual allowance (in thousands):


	Three Months Ended March 31, 2023		Year Ended December 31, 2022		Three Months Ended March 31, 2022
Balance, beginning of period	$	41,389	$	31,274	$	31,274
Add: provision for contractual adjustments	16,099		41,158		9,609
Less: contractual adjustments	(9,457)		(31,043)		(26)
Balance, end of period	$	48,031	$	41,389	$	40,857

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

The Company submitted the majority of Zio XT claims from the first and second quarter of 2021 on a delayed basis due to the CPT code transition and uncertainty over reimbursement rates. Claims were being held due to a combination of negotiations with payors and administrative delays in processing payments. Most of the held claims were released and submitted by the end of the second quarter of 2021. As of March 31, 2022, uncollected claims as a result of the CPT code transition were $12.9 million. For the contracted portfolio, once submitted, the number of claims from the first half of 2021 which contained differences between the submitted price and reimbursement rate and overall denials increased significantly compared to our historical experience as a result of CPT code transition issues with the payors. The Company continues to work with the payors to collect on these claims, and the collection cycle for these claims is significantly longer than usual. This makes the timing of the Company's collections more difficult to predict. While the Company believes it has properly estimated the impact to our contractual allowances and allowance for doubtful accounts, inherent uncertainty caused by the longer-collection cycle and claims adjudication process could result in additional provisions for contractual allowances and doubtful accounts which would negatively impact the Company's results of operations in future periods.

~~The following table presents the changes in the allowance for doubtful accounts (in thousands):~~

Three Months Ended March 31, 2022 Year Ended December 31,
2021 Three Months Ended March 31, 2021
Balance, beginning of period $ 14,012 $ 12,711 $ 12,711
Add: provision for doubtful accounts 4,413 9,615 3,095
Less: write-offs, net of recoveries and other adjustments (60) (8,314) (3,046)
Balance, end of period $ 18,365 $ 14,012 $ 12,760

~~The following table presents the changes in the contractual allowance (in thousands):~~

Three Months Ended March 31, 2022 Year Ended December 31,
2021 Three Months Ended March 31, 2021
Balance, beginning of period $ 31,274 $ 21,281 $ 21,281
Add: provision for contractual allowances 9,609 27,459 6,673
Less: realized contractual adjustments (26) (17,466) (3,185)
Balance, end of period $ 40,857 $ 31,274 $ 24,769

Concentrations of Risk

Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. Cash balances are deposited in financial institutions which, at times, may be in excess of federally insured limits. Cash equivalents are invested in ~~highly-rated~~highly rated money market funds. The Company invests in a variety of financial instruments, such as, but not limited to, U.S. government securities, corporate notes, commercial paper and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. The Company has not experienced any material losses on its deposits of cash and cash equivalents or investments.

Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many geographies. The Company does not require collateral. The Company records an allowance for doubtful accounts based on the assessment of the collectability of customer accounts, considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The Centers for Medicare and Medicaid Services ~~(“CMS”~~("CMS"), accounted for approximately ~~22%~~24% and ~~14%~~22% of the Company's revenue for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively. CMS accounted for ~~16%~~21% and 8%22% of accounts receivable at March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

Inflationary Risk

The Company continuously monitors the effects of inflationary factors, such as increases in cost of goods sold and selling and operating expenses, which may adversely affect its results of operations. Specifically, the Company may experience inflationary pressure affecting freight costs, the cost of the components for the Company’s Zio Services, overhead costs relating to maintenance of the Company’s facilities, and in the wages paid to its employees due to challenging labor market conditions. Competitive and regulatory conditions may restrict the Company’s ability to fully recover these costs through price increases. As a result, it may be difficult to fully offset the impact of persistent inflation. The Company’s inability or failure to do so could have a material adverse effect on its business, financial condition and results of operations or cause the Company to need to obtain additional capital in future earlier than anticipated.

Supply Risk

The Company relies on single-source vendors to supply some of its disposable housings, instruments and other materials used to manufacture the Zio patches and the adhesive that binds the Zio patch to a patient’s body. These components and materials are critical, and there could be a considerable delay in finding alternative sources of supply.

A global semiconductor supply shortage is having wide-ranging effects across multiple industries. The supply shortage has impacted multiple suppliers that provide the PCBAs to the Company. The semiconductor supply shortage may have an impact on the Company until global supply is sufficient for global demand.

Revenue Recognition

The Company has developed a proprietary system that combines an FDA-cleared wire-free, patch-based, 14-day wearable biosensor that continuously records ECG data, with a proprietary cloud-based data analytic platform to help physicians monitor patients and diagnose arrhythmias.In addition, the Company has received CE-mark certification for Zio XT System and ZEUS algorithm. The Company currently offers three Zio System options—the Zio XT System, the Zio AT System, and the Zio Monitor System.

The Zio XT System is a prescription-only, remote ECG monitoring system that consists of the Zio XT patch that records the electric signal from the heart continuously for up to 14 days and the ZEUS System, which supports the capture and analysis of ECG data recorded by the Zio XT patch at the end of the wear period, including specific arrhythmia events detected by the ZEUS algorithm. The final step in the Zio Services is the delivery of an electronic Zio report to the prescribing physician with a summary of findings. The Company’s Zio XT services are generally billable when the Zio report is issued to the physician.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

~~Revenue Recognition~~

The ~~Company’s revenue~~Zio Monitor System is ~~generated primarily from~~ the ~~provision~~next generation of ~~its ambulatory cardiac rhythm monitoring service,~~ the Zio XT ~~service. The~~System, and is a prescription-only, remote ECG monitoring system that consists of the Zio ~~XT is an ambulatory cardiac rhythm monitoring service~~Monitor patch that ~~has a patient wear period of~~records the electric signal from the heart continuously for up to 14 days and isthe ZEUS System, which supports the capture and analysis of ECG data recorded by the Zio Monitor patch at the end of the wear period, including specific arrhythmia events detected by the ZEUS algorithm. The Company’s Zio Monitor services are generally billable when the ~~monitoring reports are delivered~~Zio report is issued to the healthcare provider, which is also when the service is complete, and the Company recognizes revenue. The time from when the patient has the Zio XT device applied to the time the report is posted is generally around 25 days. The Company has concluded that the Zio XT service is one performance obligation on the basis that the customer cannot benefit from each component of the service on its own or together with other resources that are readily available to the customer.physician.

The Zio AT ~~mobile cardiac telemetry monitor,~~System is a ~~wearable patch-based biosensor, offers what~~prescription-only, remote ECG monitoring system that similarly consists of the Zio ~~XT offers plus~~AT patch that records the ~~additional capability of transmissions~~electric signal from the heart continuously for up to 14 days and the ZEUS System, but which also incorporates the Zio AT wireless gateway that provides connectivity between the patch and the ZEUS System during the patient wear ~~period~~period. The wireless gateway, slightly larger than a smart phone, is provided to ~~assist physicians in diagnosing~~the patient at the time of Zio AT patch application and ~~treating patients that require more timely action. During~~collects and transmits data from the ~~wear period, physicians will receive notifications if there are significant events that meet predetermined arrhythmia detection criteria.~~Zio AT patch to the cloud via a LTE protocol. The Zio AT service revenue is recognized over the ~~prescription~~patient wear period and delivery of an electronic Zio ~~report~~reports with two ~~performance~~ performance obligations.

The Company recognizes as revenue the amount of consideration to which it expects to be entitled in exchange for performing the ~~Zio~~ service. The consideration the Company is entitled to varies by portfolio, as further defined below, and includes estimates that require significant judgment by management. A unique aspect of healthcare is the involvement of multiple ~~parties' involvement in~~parties to the service transaction. In addition to the patient, often a third-party, for example a commercial or governmental payor or healthcare institution, will pay the Company for some or all of the service on the patient’s behalf. Separate contractual arrangements exist between the Company and third-party payors that establish amounts the third-party payor will pay on behalf of a patient for covered services rendered.

A small portion of the Company’s transactions are covered by third-party payors with whom there is neither a contractual agreement nor an established amount that the third-party payor will pay. In determining the collectability and transaction price for its service, the Company considers factors such as insurance claims which are adjudicated as allowable under the applicable policy and payment history from both payors and patient out-of-pocket costs, payor coverage, whether there is a contract between the payor or healthcare institution and the Company, historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments. Certain of these factors are forms of variable consideration which are only included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

A summary of the payment arrangements with third-party payors and healthcare institutions is as follows:

•Contracted third-party payors – The Company has contracts with negotiated prices for services provided to patients with commercial healthcare insurance coverage.

•CMS – The Company has received ~~independent diagnostic testing facility~~IDTF approval from regional Medicare Administrative Contractors and will receive reimbursement per the relevant CPT code rates for the services rendered to the patient covered by CMS.

•Healthcare institutions – Healthcare institutions are typically hospitals or physician practices in which the Company has negotiated amounts for its monitoring services, including certain governmental agencies such as the Veterans Administration and Department of Defense.

•Non-contracted third-party payors – Non-contracted commercial and government payors often reimburse out-of-network rates provided under the relevant CPT codes on a case-by-case basis. The transaction price used for determining revenue recognition is based on factors including an average of the Company’s historical collection experience for its non-contracted services. This rate is reviewed at least quarterly.

The Company is utilizing the portfolio approach practical expedient under ASC 606, ~~for revenue recognition~~ Revenue from Contracts with Customers, whereby services provided under each of the above payor types form a separate portfolio. The Company accounts for the contracts within each portfolio as a collective group, rather than individual contracts. Based on history with these portfolios and the similar nature and characteristics of the patients within each portfolio, the Company has concluded that the financial statement effects are not materially different than if accounting for revenue on a contract-by-contract basis.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

For contracted and CMS portfolios, the Company recognizes revenue, net of contractual allowances, and recognizes an allowance for doubtful accounts for uncollectible patient accounts receivable. The transaction price is determined based on

~~IRHYTHM TECHNOLOGIES, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)~~

negotiated rates, and the Company has historical experience of collecting substantially all of these contracted rates. These contracts also impose a number of obligations regarding billing and other matters, and the Company’s noncompliance with a material term of such contracts may result in a denial of the claim. The Company accounts for denied claims as a form of variable consideration that is included as a reduction to the transaction price recognized as revenue.

The Company makes estimates around the amount of denied claims ~~which require~~within a reporting period, a process that requires management judgment. The estimated denied claims are based on historical information, and ~~judgment~~judgement includes the historical period utilized. The Company monitors the estimated denied claims against the latest available information, and subsequent changes to the estimated denied claims are recorded as an adjustment to revenue in the periods during which such changes occur. Delays in claims submissions could lead to an increase in denials if the Company misses the payors’ filing deadlines and could result in a reduction in the Company’s receipt of payments. Historical cash collection indicates that it is probable that substantially all of the transaction price, less the estimate of denied claims, will be received. Contracted payors may require that the Company ~~bill~~bills patient co-payments and deductibles and from time to time the Company may not be able to collect such amounts due to credit risk. The Company provides for estimates of uncollectible patient accounts receivable, based upon historical experience where judgment includes the historical period utilized, at the time revenue is recognized, with such provisions presented as bad debt expense within the selling, general and administrative line item of the consolidated statement of operations. Adjustments to these estimates for actual experience are also recorded as an adjustment to bad debt expense.

~~As discussed in the~~ ~~Accounts Receivable, Allowance for Doubtful Accounts and Contractual Allowances~~ section above, the inherent uncertainty caused by longer-collection cycle and claims adjudication process related to delays in submission because of the CPT code transition in 2021 could result in additional provisions for contractual allowances and doubtful accounts which would negatively impact the Company's results of operations in future periods.

For non-contracted portfolios, the Company is providing an implicit price concession due to the lack of a contracted rate with the underlying payor, the result of which requires the Company to estimate the transaction price based on historical cash collections utilizing the expected value method. All subsequent adjustments to the transaction price are recorded as an adjustment to revenue.

For healthcare institutions, the transaction price is determined based on negotiated rates, and the Company has historical experience collecting substantially all of these contracted rates. Historical cash ~~collection indicates~~collections indicate that it is probable that substantially all of the transaction price will be received. As such, the Company is not providing an implicit price concession but, rather, has chosen to accept the risk of default, and any subsequent uncollected amounts are recorded as bad debt ~~expense.~~expense to selling, general and administrative expense in the consolidated statements of operations.

For non-contracted portfolios, the Company provides an implicit price concession due to the lack of a contracted rate with the underlying payor. As a result, the Company estimates the transaction price based on historical cash collections utilizing the expected value method. All subsequent adjustments to this transaction price are recorded to revenue.

~~Disaggregation of Revenue~~

The Company disaggregates revenue from contracts with customers by payor type. The Company believes these categories aggregate the payor types by nature, amount, timing and uncertainty of its revenue streams. Disaggregated revenue by payor type and major service line for three months ended March 31, 2022 and March 31, 2021 were as follows (in thousands):
Three Months Ended March 31,
2022 2021
Contracted third-party payors $ 51,751 $ 46,592
Non-contracted third-party payors 5,487 5,278
Centers for Medicare & Medicaid 20,062 10,177
Healthcare Institutions 15,078 12,264
Total $ 92,378 $ 74,311

~~Contract Liabilities~~

ASC 606 requires an entity to present a revenue contract as a contract liability when the Company has an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer, or an amount of consideration from the customer is due and unconditional (whichever is earlier).

Certain of the Company’s customers pay the Company directly for the Zio XT service upon shipment of devices. Such advance payments are contract liabilities and are recorded as deferred revenue on the Condensed Balance Sheets and revenue is recognized when reports are delivered to the healthcare provider. During the three months ended March 31, 2022, $2.7 million

~~IRHYTHM TECHNOLOGIES, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)~~

relating to the contract liability balance at the beginning of 2022 was recognized as revenue. During the three months ended March 31, 2021, $0.9 million included in the contract liability balance at the beginning of 2021 was recognized as revenue.

~~Contract Costs~~

Under ASC 340, the incremental costs of obtaining a contract with a customer are recognized as an asset. Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained.

The Company’s current commission programs are considered incremental. However, as a practical expedient, ASC 340 permits the Company to immediately expense contract acquisition costs, as the asset that would have resulted from capitalizing these costs will be amortized in one year or less.

~~Stock-based~~Stock-Based Compensation

The Company measures ~~its stock-based awards made to employees based on~~ the estimated fair values of its restricted stock units based on the ~~awards as~~closing price of the Company's stock on the grant date. ~~The fair value of market condition awards is determined using~~For performance-based restricted stock units, the ~~Monte-Carlo option pricing model and~~Company estimates the fair value based on the closing price of its stock ~~options is determined using~~on the ~~Black-Scholes option pricing~~grant date and, if the award includes a market condition, a Monte Carlo simulation model. In addition, for performance-based restricted stock units, the Company applies a probability assessment to determine the probable achievement of the performance-based metrics.

Stock-based compensation expense is recognized over the requisite service period using the straight-line method and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, the ~~Company’s~~Company's stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For restricted stock, the compensation cost for these awards is based on the closing price of the Company’s common stock on the date of grant, and recognized as compensation expense on a straight-line basis over the requisite service period.

The Company recognizes compensation expense related to the Employee Stock Purchase Plan (“ESPP”) based on the estimated fair value of the options on the date of grant, net of estimated forfeitures. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model for each purchase period. The grant date fair value is expensed on a straight-line basis over the offering period.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

3. REVENUE

Disaggregation of Revenue


	Three Months Ended March 31,
	2023			2022
	Amount		% of Revenue	Amount		% of Revenue
Contracted third-party payors	$	61,907	56%	$	51,751	56%
Centers for Medicare and Medicaid	26,491		24%	20,062		22%
Healthcare institutions	15,781		14%	15,078		16%
Non-contracted third-party payors	7,257		6%	5,487		6%
Total	$	111,436		$	92,378

Revenue generated from the United States comprised substantially all of the Company's revenue. No other country comprised 10% or greater of the Company's revenue during each of the three months ended March 31, 2023 and 2022.

Contract Liabilities

ASC 606, Revenue from Contracts with Customers, requires an entity to present a revenue contract as a contract liability when the Company has an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer, or an amount of consideration from the customer is due and unconditional (whichever is earlier).

Certain of the Company’s customers pay the Company directly for the Zio XT service upon shipment of devices. Such advance payments are contract liabilities and are recorded as deferred revenue when reports are delivered to the healthcare provider. During the three months ended March 31, 2023, $2.7 million relating to the contract liability balance at the beginning of 2023 was recognized as revenue. During the three months ended March 31, 2022, $2.7 million relating to the contract liability balance at the beginning of 2022 was recognized as revenue.

Contract Costs

Under ASC 340, Other Assets and Deferred Costs ("ASC 340"), the incremental costs of obtaining a contract with a customer are recognized as an asset. Incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained.

The Company’s current commission programs are considered incremental. However, as a practical expedient, ASC 340 permits the Company to immediately expense contract acquisition costs, because the asset that would have resulted from capitalizing these costs will be amortized in one year or less.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

~~3. Cash Equivalents and Investments~~4. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The fair value of cash equivalents and ~~available-for-sale~~short-term investments atas of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, were as follows (in thousands):

March 31, 2022
Amortized
Cost Gross Unrealized Estimated
Fair Value
Gains Losses
Money market funds $ 42,589 $ — $ — $ 42,589
U.S. government securities 88,328 5 (322) 88,011
Corporate notes 13,039 — (36) 13,003
Commercial paper 12,984 — — 12,984
Total cash equivalents and available-for-sale investments $ 156,940 $ 5 $ (358) $ 156,587
Classified as:
Cash equivalents $ 42,589
Short-term investments 113,998
Total cash equivalents and available-for-sale investments $ 156,587
December 31, 2021
Amortized
Cost Gross Unrealized Estimated
Fair Value
Gains Losses
Money market funds $ 110,137 $ — $ — $ 110,137
U.S. government securities 50,490 — (46) 50,444
Corporate notes 31,158 — (15) 31,143
Commercial paper 29,982 — — 29,982
Total cash equivalents and available-for-sale investments $ 221,767 $ — $ (61) $ 221,706
Classified as:
Cash equivalents $ 110,137
Short-term investments 111,569
Total cash equivalents and available-for-sale investments $ 221,706

~~The following table summarizes the fair value of the Company’s cash equivalents, short-term and long-term marketable securities classified by maturity (in thousands):~~

March 31,
2022 December 31,
2021
Due within one year $ 156,587 $ 221,706
Due after one year through three years — —
Total cash equivalents and available-for-sale investments $ 156,587 $ 221,706

There were no available-for-sale securities that were in an unrealized loss position for more than twelve months as of March 31, 2022. Unrealized losses as of March 31, 2022, and December 31, 2021, were not material. Available-for-sale securities held as of March 31, 2022, had a weighted average maturity of 111 days. At March 31, 2022, 11 investments were in an unrealized loss position and no investments have been in an unrealized loss position for more than one year.


	March 31, 2023
	Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses
Money market funds	$	6,845	$	—	$	—	$	6,845
U.S. government securities	123,602		65		(134)		123,533
Total cash equivalents and short-term investments	$	130,447	$	65	$	(134)	$	130,378
Classified as:
Cash equivalents							$	6,845
Short-term investments							123,533
Total cash equivalents and short-term investments							$	130,378

	December 31, 2022
	Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses
Money market funds	$	24,263	$	—	$	—	$	24,263
U.S. government securities	134,709		12		(409)		134,312
Total cash equivalents and short-term investments	$	158,972	$	12	$	(409)	$	158,575
Classified as:
Cash equivalents							$	24,263
Short-term investments							134,312
Total cash equivalents and short-term investments							$	158,575

~~4. Fair Value Measurements~~5. FAIR VALUE MEASUREMENTS

The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

~~IRHYTHM TECHNOLOGIES, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)~~

Level 1- —Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2- —Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3- —Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The ~~corporate notes, commercial paper and~~U.S. government securities are classified as Level 2 as they were valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.

The Company's interest-bearing obligation is classified as Level 2. As of March 31, 2023 the fair value of the Company’s outstanding interest-bearing ~~obligations is estimated using~~obligation approximated the ~~net present~~carrying value of $34.9 million. As of December 31, 2022, the ~~future payments, discounted at an interest rate that is consistent with market interest rates, which is a Level 2 input. The carrying amount and the estimated~~ fair value of the Company’s outstanding interest-bearing ~~obligations at March 31, 2022, were $34.9 million and $36.5 million, respectively. The~~obligation approximated the carrying ~~amount and the estimated fair~~ value of ~~the Company’s outstanding interest-bearing obligations at December 31, 2021, were $21.4 million and $21.7 million, respectively.~~$34.9 million.

The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value.

The following tables present the fair value of the Company’s financial assets determined using the inputs defined above (in thousands).:


		March 31, 2022									March 31, 2023
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Assets	Assets									Assets
Money market funds	Money market funds	$	42,589	$	—	$	—	$	42,589	Money market funds	$	6,845	$	—	$	—	$	6,845
U.S. government securities	U.S. government securities	—		88,011		—		88,011		U.S. government securities	—		123,533		—		123,533
Corporate notes		—		13,003		—		13,003
Commercial paper		—		12,984		—		12,984
Total	Total	$	42,589	$	113,998	$	—	$	156,587	Total	$	6,845	$	123,533	$	—	$	130,378


		December 31, 2021									December 31, 2022
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Assets	Assets									Assets
Money market funds	Money market funds	$	110,137	$	—	$	—	$	110,137	Money market funds	$	24,263	$	—	$	—	$	24,263
U.S. government securities	U.S. government securities	—		50,444		—		50,444		U.S. government securities	—		134,312		—		134,312
Corporate notes		—		31,143		—		31,143
Commercial paper		—		29,982		—		29,982
Total	Total	$	110,137	$	111,569	$	—	$	221,706	Total	$	24,263	$	134,312	$	—	$	158,575

6. BALANCE SHEET DETAILS

Inventory

Inventory consisted of the following (in thousands):


	March 31, 2023		December 31, 2022
Raw materials	$	9,253	$	9,338
Finished goods	7,135		5,817
Total	$	16,388	$	15,155

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Other Assets

~~5. Balance Sheet Components~~

~~Inventory and~~ Other ~~Assets~~

~~Inventory~~assets consisted of the following (in thousands):


	March 31, 2023		December 31, 2022
PCBAs	$	21,545	$	18,599
Cloud computing arrangements	2,611		2,523
Other	1,284		1,130
Total	$	25,440	$	22,252

March 31,
2022 December 31,
2021
Raw materials $ 6,946 $ 5,101
Finished goods 5,500 5,167
Total $ 12,446 $ 10,268

The Company uses PCBAs in each wearable Zio XT patch and Zio AT ~~monitor~~patch, as well as in the wireless gateway used in conjunction with the Zio AT ~~monitor.~~patch. The PCBAs are used numerous times and have useful lives beyond one year. Each time a PCBA is used in a wearable Zio XT ~~monitor~~patch or Zio AT ~~monitor,~~patch, a portion of the cost of the PCBA is recorded as a cost of revenue. Each time a wireless gateway is used with a Zio AT ~~monitor,~~patch, a portion of the gateway is recorded as a cost of revenue. PCBAs, which are recorded as other assets, were ~~$16.4~~$21.5 million and ~~$13.9~~$18.6 million as of March 31, ~~2022,~~2023, and December 31, ~~2021,~~2022, respectively.

The amortization was $1.4 million and $1.2 million for the three months ended March 31, 2023 and 2022, respectively.

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):


		March 31, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Laboratory and manufacturing equipment	Laboratory and manufacturing equipment	$	5,365	$	5,029	Laboratory and manufacturing equipment	$	4,965	$	4,911
Computer equipment and software	Computer equipment and software	2,417		2,353		Computer equipment and software	2,448		2,315
Furniture and fixtures	Furniture and fixtures	3,678		4,174		Furniture and fixtures	4,197		4,119
Leasehold improvements	Leasehold improvements	18,631		20,431		Leasehold improvements	23,533		23,144
Internal-use software	Internal-use software	52,890		46,661		Internal-use software	44,877		44,877
Internal-use software in development						Internal-use software in development	35,919		28,069
Construction in progress						Construction in progress	5,061		3,451
Total property and equipment, gross	Total property and equipment, gross	82,981		78,648		Total property and equipment, gross	121,000		110,886
Less: accumulated depreciation and amortization	Less: accumulated depreciation and amortization	(25,846)		(22,704)		Less: accumulated depreciation and amortization	(38,792)		(35,216)
Total property and equipment, net	Total property and equipment, net	$	57,135	$	55,944	Total property and equipment, net	$	82,208	$	75,670

Depreciation and amortization expense ~~was $3.1 million and $2.0 million~~ for the three months ended March 31, 2023 and 2022 was $3.6 million and ~~2021,~~$3.1 million, respectively, of which amortization related to internal-use software, was $2.7 million and $2.2 million, respectively.

During the three months ended March 31, ~~2022,~~2023, internal-use software increased by $7.9 million. This increase relates to the ~~Company recorded $2.2 million~~enhancements to the Company’s core technology, products and ~~$0.5 million~~services and artificial intelligence, as well as investment in ~~impairment charges to leasehold improvements~~future technology, such as the Zio Monitor System, the Company's new biosensor technology platform, and ~~furniture and fixtures disclosed above, respectively in connection with its decision to sublease its San Francisco headquarters. See Note~~ ~~6. Impairment and Restructuring~~.

~~Accrued Liabilities~~

~~Accrued liabilities consisted of~~ the ~~following (in thousands):~~

March 31,
2022 December 31,
2021
Accrued vacation $ 8,371 $ 7,431
Accrued payroll and related expenses 18,871 34,484
Accrued ESPP contribution 2,748 1,002
Accrued professional services fees 1,794 1,724
Accrued interest 47 78
Claims payable 2,770 2,988
Restructuring liability 2,902 —
Other 4,432 3,779
Total accrued liabilities $ 41,935 $ 51,486

clinically-integrated ZEUS System for the Zio Watch.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):


	March 31, 2023		December 31, 2022
Accrued payroll and related expenses	$	23,696	$	34,752
Accrued vacation	9,484		8,608
Accrued expenses	8,186		7,006
Claims payable	4,648		4,464
Accrued employee share purchase plan contributions	3,068		1,045
Accrued state and foreign income and sales taxes	2,939		2,388
Accrued professional services fees	2,586		7,234
Total accrued liabilities	$	54,607	$	65,497

During the three months ended March 31, 2023, the Company incurred $5.7 million of transformation expenses to scale the organization and will continue to incur such expenses through mid-2024. Included in accrued liabilities, above, were $2.1 million in accrued payroll and related expenses and $0.9 million in accrued professional services fees.

7. IMPAIRMENT AND RESTRUCTURING CHARGES

During the three months ended March 31, 2023, there were no impairment and restructuring charges.

In February 2022, the Company's board of directors (the “Board”) approved a restructuring plan ("Restructuring Plan") to allow it to effectively and efficiently scale its business, which resulted in severance and other employment related costs of $3.4 million during the three months ended March 31, 2022. Also in February 2022, the Board approved reducing the Company's leased space for its headquarters in San Francisco, California, by a total amount of leased square footage of approximately 50%. As a result, the Company recognized an impairment of its ROU asset and related leasehold improvements and furniture and fixtures in the amount of $23.2 million during the three months ended March 31, 2022. The Company's restructuring and impairment charges are described below (in thousands):


	Three Months Ended March 31, 2022
Restructuring charges	$	3,444
Impairment charges	23,164
Total	$	26,608

6. For further details, please refer to Note 7 “Impairment and Restructuring ~~Charges~~” included in the financial statements accompanying the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Restructuring

On February 15, 2022, the Company's Board of Directors (the “Board”) approved a restructuring plan (“Q1 2022 Restructuring Plan”) to allow the Company to effectively and efficiently scale its business. The Q1 2022 Restructuring Plan resulted in severance and other employment related costs. The Company completed required notifications under the Q1 2022 Restructuring Plan in March 2022 and has recorded $3.4 million of restructuring charges for the three month period ended March 31, 2022.

~~Restructuring liabilities are reported within accrued liabilities in the Condensed Consolidated Balance Sheets.~~ The following table provides a summary of changes in the restructuring liabilities associated with the ~~Q1 2022~~ Restructuring Plan (in thousands):

December 31,
2021 Charges Cash Payments March 31,
2022
Employee severance $ — $ 3,444 $ (542) $ 2,902
Total $ — $ 3,444 $ (542) $ 2,902

~~Impairment~~

On October 4, 2018, the Company entered into a lease arrangement (“San Francisco Lease”) in connection with its headquarters in San Francisco, California. The San Francisco Lease commenced on May 13, 2019, and the Company began using the premises as its corporate headquarters. The San Francisco lease expires in August 2031.

In an effort to reduce the Company's footprint and as a result of remote work arrangements, the Board of Directors (the “Board”) agreed to pursue a sublease for a portion of the Company’s Headquarters in San Francisco, CA in February 2022 in order to reduce the total number of leased square footage by approximately 50%.

The sublease market for commercial office space is currently very challenging in the San Francisco area due to lower demand for leased office space as most companies have adjusted to allowing their employees to work from home during the COVID-19 pandemic that has persisted throughout 2020 and 2021. The Company expects that it will only be able to sublease a portion of its existing office space at a rate below the amount that it is currently paying. The Company has engaged a leasing broker and has formalized a marketing plan for the San Francisco office market.

Significant judgment and estimates are required in assessing impairment of ROU assets, including identifying whether events or changes in circumstances require an impairment assessment, estimating future cash flows, and determining appropriate discount rates. The Company's fair value estimates are based on assumptions management believes to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

~~The following table presents impairment charges recorded during the three months ended March 31, 2022:~~


~~ROU Asset~~	$	~~20,451~~
~~Furniture and Fixtures~~	~~2,211~~
~~Leasehold Improvements~~	~~502~~
~~Total~~	$	~~23,164~~


	December 31, 2022		Charges		Cash Payments		March 31, 2023
Employee severance	$	394	$	—	$	(394)	$	—
Total	$	394	$	—	$	(394)	$	—

~~For further details on the Company's leases, refer to~~ ~~Note. 7. Commitments and Contingencies.~~

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

8. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

The Company is party to various purchase arrangements related to its manufacturing and research and development activities. During the quarter ended March 31, 2023, there were no material changes to purchase commitments from those disclosed in the financial statements accompanying the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, in Note 8, “

7. Commitments and Contingencies.”

~~Lease Arrangements~~Leases

The Company leases office, manufacturing, and clinical centers under non-cancelable operating leases which expire on various dates through 2031. These leases generally contain scheduled rent increases or escalation clauses and renewal options. Operating lease ~~right-of-use~~ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at ~~the~~ commencement date. The operating lease ~~right-of-use~~ROU assets also include any lease payments made to the lessor at or before the commencement date as well as variable lease payments which are based on a consumer price index. The Company is also subject to variable lease payments related to janitorial services and electricity which are not included in the operating lease ~~right-of-use~~ROU asset as they are based on actual usage. The Company recognizes operating lease ~~expense~~expenses, generally on a straight-line basis over the lease period. ~~The total operating lease cost recognized during~~

During the three months ended March 31, ~~2022 was $3.4 million, which primarily consisted of lease payments~~2023, there were no material changes to the leases from those described in Note 8, Commitments and ~~common area maintenance costs. Cash paid~~Contingencies, included in the Company's Annual Report on Form 10-K for ~~operating leases during~~ the ~~three months~~year ended ~~March~~December 31, ~~2022, was $3.2 million.~~

2022.

On October 4, 2018, the Company entered into the San Francisco Lease to rent approximately 117,560 rentable square feet in San Francisco, California, which became the Company’s new headquarters in October 2019. The term of the San Francisco Lease began on May 13, 2019, and expires on August 31, 2031. The Company is entitled to 1 option to extend the San Francisco Lease for a five-year term, subject to certain requirements.

On October 29, 2009, the Company entered into a lease for a clinic (“Lincolnshire Lease”) to rent approximately 41,500 rentable square feet in Lincolnshire, Illinois, which became the Company’s clinical operational facilities. The term of the Lincolnshire Lease began on November 1, 2009, and expires on July 31, 2022.

On March 18, 2021, the Company entered into an office/industrial lease (“Cypress Lease”) to rent approximately 68,933 rentable square feet in Cypress, California, which became the Company’s new office and warehouse facilities. The term of the Cypress Lease began on October 25, 2021, and expires on April 30, 2032. The Company is entitled to 1 option to extend the Cypress Lease for a five-year term, subject to certain requirements.

In December 2021, the Company entered into a lease for 44,616 rentable square feet in Deerfield, Illinois (“Deerfield Lease”). The effective term of the Deerfield Lease began on January 2, 2022 and will expire on June 1, 2033. The Company is entitled to 1 option to extend the Deerfield Lease for a five-year term, subject to certain requirements.

On February 14, 2022, the Company entered into a lease for 3,238 rentable square feet in Encinitas, California (“Encinitas Lease”). The term of the Encinitas Lease began on March 1, 2022, and expires on February 28, 2024.

On February 15, 2022, the Board agreed to pursue a sublease of the majority of space on one floor (approximately 50%) of the San Francisco Lease. The Company recorded $20.5 million in impairment charges on its ROU asset during the three months ended March 31, 2022. See ~~Note 6. Impairment and Restructuring~~ ~~for further details.~~

~~As of March 31, 2022, maturities of~~Contractual obligations under operating lease liabilities were as follows (in thousands):

Period Ended March 31:
2022 $ 6,550
2023 13,995
2024 14,265
2025 14,681
2026 15,108
Thereafter 75,390
Total lease payments 139,989
Less: imputed interest (42,144)
Total lease liabilities $ 97,845

The weighted average remaining lease term of the Company's operating leases as of March 31, 2022, was 9.56 years. The weighted average discount rate of the Company's operating leases was 7.28% as of March 31, 2022.

~~IRHYTHM TECHNOLOGIES, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)~~


Year Ending December 31:
2023 (remainder of the year)	$	15,609
2024	20,586
2025	20,379
2026	20,131
2027	19,731
Thereafter	34,392
Total lease payments	130,828
Less: imputed interest	(34,784)
Total lease liabilities	$	96,044

Legal Proceedings

From time to time, the Company is involved in claims and legal proceedings or investigations, that arise in the ordinary course of business. Such matters could have an adverse impact on the Company's reputation, business, and financial condition and divert the attention of its management from the operation of ~~its~~the Company's business. These matters are subject to many uncertainties and outcomes that are not predictable.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

On February 1, 2021, a putative class action lawsuit was filed in the United States District Court for the Northern District of California (the “Court”) alleging that the Company and its former Chief Executive Officer, Kevin M. King, violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder (“Securities Class Action Lawsuit”). On August 2, 2021, the lead plaintiff filed an amended complaint, and filed a further amended complaint on September 24, 2021. The amended complaint names as defendants, in addition to the Company and Mr. King, ~~the Company's~~its former Chief Executive Officer, Michael J. Coyle, and ~~current~~former Chief Financial Officer and former Chief Operating Officer, Douglas J. Devine. The purported class in the amended complaint includes all persons who purchased or acquired the Company's common stock between August 4, 2020 and July 13, 2021, and seeks unspecified damages purportedly sustained by the class. On October 27, 2021, the Company filed a motion to dismiss the amended complaint. The motion to dismiss was fully briefed and the Court held a hearing on the motion on February 4, 2022, after which the Court took the matter under submission. On March 31, 2022, the Court issued an order granting the ~~Company’s~~Company's motion to dismiss the Securities Class Action Lawsuit, without allowing plaintiff further leave to amend, and entered judgment in favor of the Company and the other defendants. ~~Plaintiff has~~On April 29, 2022, the plaintiff that filed the initial complaint in the action filed a notice of appeal. On September 7, 2022, the plaintiff-appellant filed its opening brief, and the Company filed a motion to dismiss for lack of standing to appeal and Article III standing on September 27, 2022. On October 17, 2022, the plaintiff filed its response to the Company's motion to dismiss, and the Company filed its reply in support of the motion to dismiss on November 3, 2022. The Company's motion to dismiss the appeal was denied without prejudice on December 8, 2022. The Company filed its responding brief on the appeal on February 16, 2023. The Company believes the ~~class action~~Securities Class Action Lawsuit to be without merit and ~~plans~~plan to ~~vigorously~~ defend ~~itself.~~itself vigorously.

On March 26, 2021, the Company received a grand jury subpoena from the U.S. Attorney’s Office for the Northern District of California requesting information related to communications with the Food and Drug Administration and the ~~Company’s products.~~Company's products and services. On ~~October~~September 14, 2021, the Company received a second subpoena requesting additional information. On April 4, 2023, the Company received a Subpoena Duces Tecum from the Consumer Protection Branch, Civil Division of the U.S. Department of Justice, requesting production of various documentsregarding the Company’s products and services. The Company is cooperating fully ~~and is providing the requested information.~~on these matters.

Development Agreement

On September 3, 2019, the Company entered into a Development Collaboration Agreement ~~(the “Development Agreement”)~~ with Verily Life Sciences LLC, an Alphabet company (“~~Verily”~~VLS”) and Verily Ireland Limited (“VIL” And together with VLS, “Verily”) (such Development Collaboration Agreement, as amended by Amendment No.1 dated April 26, 2021 and Amendment No.2 dated January 24, 2022, the “Development Agreement”). The Development Agreement ~~which is over a 24-month term,~~ involves joint development and production of intellectual property between the Company and Verily. Each participant has primary responsibility for certain aspects of development and approval, with all processes to be performed at each respective party’s own cost. Costs incurred by the Company in connection with the Development Agreement will be expensed as research and development expense in accordance with ASC 730, Research and ~~Development.~~

Development
.

The Company and Verily will develop certain next-generation atrial fibrillation (“~~AF”~~Afib”) screening, detection, or monitoring products pursuant to the Development Agreement, which products will involve combining Verily and the Company’s technology platforms and capabilities. Under the terms of the Development Agreement, the Company paid Verily an upfront fee of $5.0 million in 2019. In addition, the Company ~~has~~ agreed to make additional cash payments to Verily up to an aggregate of $12.75 million in milestone payments upon achievement of various development and regulatory milestones over the ~~24 months~~term of the Development Agreement.

~~We have~~ The Company has achieved milestones tied to payments totaling $11.0 million to date and ~~we have agreed~~expects to make additional payments over the term of the Development Agreement ~~up to an aggregate~~ of $1.75 million, subject to the achievement of certain development and regulatory milestones including provisioning of the Zio Watch ~~and completion of~~to enable market evaluation scheduled to begin in ~~the first half of~~ 2023.

No payment-triggering milestones were achieved during the three months ended March 31, ~~2022.~~2023.

The Development Agreement provides each party with licenses to use certain intellectual property of the other party for development activities in the field of AFAfib screening, detection, or monitoring. Ownership of developed intellectual property will be allocated to the Company or Verily depending on the subject matter of the underlying developed intellectual property, and, for certain subject matter, shall be jointly owned.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Indemnifications

In the ordinary course of business, the Company enters into agreements pursuant to which it agrees to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including losses arising out of the breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made

~~IRHYTHM TECHNOLOGIES, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)~~

by third parties. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by applicable law. The Company currently has directors’ and officers’ insurance. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions, and believes that the estimated fair value of these indemnification obligations is not material and it has not accrued any amounts for these obligations.

~~8. Debt~~

~~Bank Debt~~9. DEBT

In October 2018, the Company entered into the Third Amended and Restated Loan and Security Agreement ~~with SVB~~ (“SVB Loan Agreement”) with Silicon Valley Bank (“SVB”). Under the SVB Loan Agreement, the Company had borrowed $35.0 million and had made repayments through March 2022, at which time the outstanding balance was $18.5 million.

On March 28, 2022, the Company entered into a Second Amendment (“2022 Amendment”) to its SVB Loan Agreement which provided for a term ~~loan~~loans facility in the aggregate principal amount of up to $75.0 million (the “2022 Term Loans”), of which $35.0 million ~~aggregate principal amount of 2022 Term Loans were~~was borrowed at closing and a portion of the proceeds ~~of which were~~was used to pay in full the outstanding balance of $18.5 million under the SVB Loan Agreement. The remaining $40.0 million of 2022 Term Loans may be borrowed from time to time at the Company’s option, in increments of at least $10.0 million, through December 31, 2023. The Company ~~shall~~will pay interest only on the 2022 Term Loans until April 1, 2025, when it ~~shall~~will commence repaying the 2022 Term Loans in 24 equal consecutive monthly installments, with all obligations under the 2022 Term Loans maturing on March 1, 2027. Interest charged on the 2022 Term Loans ~~shall~~will accrue at a floating per annum rate equal to the greater of: (A) the Prime Rate plus 0.25%; and (B) 3.50%. The Company is also required to pay fees on any prepayment of the 2022 Term Loans, ranging from 3.0% to 1.0% depending on the date of prepayment, and a final payment equal to 5.0% of the principal amount of the 2022 Term Loans drawn. Once repaid or prepaid, the 2022 Term Loans may not be reborrowed.

The Company accounted for the refinancing as an extinguishment of the original loans and paid a fee of $1.8 million, which was included in interest expense on the Consolidated Statement of Operations and recorded the 2022 Term Loans, net of issuance costs. The issuance costs on the new loans are amortized over the term of the loan.

The 2022 Amendment also amended the terms of the revolving credit line under the SVB Loan Agreement, which provided for an aggregate principal amount of $25.0 million, to: (i) extend the maturity date from August 1, 2023 to March 1, 2027, (ii) increase the letters of credit sublimit to $15.0 million and (iii) increase the cash management services sublimit to $15.0 million. Interest charged on the principal amount outstanding under the revolving credit line shall accrue at a floating per annum rate equal to the greater of (A) the Prime Rate plus 0.25% and (B) 3.50%. The Company is required to pay an annual fee equal to 0.15% of the revolving credit line. As of March 31, ~~2022,~~2023, no loans were outstanding under the revolving credit ~~line.~~

line and the Company used $8.4 million in letters of credit.

The 2022 Amendment also amended the SVB Loan Agreement to require the Company to comply, as of the last day of each fiscal quarter, with a quick ratio of at least 1.15 to 1.0 or minimum adjusted EBITDA trailing 6 months of at least $15.0 million.

On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver. On March 12, 2023, the U.S. Department of the Treasury, Federal Reserve Board, and FDIC released a joint statement announcing that the FDIC would complete its resolution of SVB in a manner that fully protected all depositors at SVB and that depositors would have access to all of their money starting March 13, 2023. On March 26, 2023, it was announced that First-Citizens Bank & Trust Company would assume all of SVB’s deposits and loans as of March 27, 2023. The Company continues to have access to the revolving credit line and letters of credit available pursuant to the SVB Loan Agreement and was in compliance with its loan covenants as of March 31, ~~2022.~~

2023.

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Future minimum payments

~~Future minimum~~Contractual obligations for the 2022 term loans comprise principal and interest payments ~~under the Amendment to the SVB Loan Agreement at March 31, 2022, are~~ as follows (in thousands):


Year Ending December 31,
2023 (remainder of the year)	$	2,141
2024	2,847
2025	15,608
2026	18,623
2027	4,434
Total	43,653
Less: Amount representing interest	(8,653)
Less: Debt issuance costs	(61)
Principal payments	$	34,939

Year Ending December 31,
2022 $ 893
2023 1,331
2024 1,334
2025 14,289
2026 18,026
Thereafter 4,403
Total 40,276
Less: Amount representing interest (5,276)
Less: Debt Issuance Costs (83)
Total Carrying Value $ 34,917
Reported as:
Short-term debt $ —
Long-term debt 34,917
Total $ 34,917

10. INCOME TAXES

~~9. Income Taxes~~

The Company recorded a tax provision related to its U.S. state taxes and the U.K. subsidiary during the three months ended March 31, ~~2022,~~2023 and ~~March 31, 2021.~~2022. Due to the uncertainties surrounding the realization of the U.S. deferred tax assets through future taxable income, the Company has provided a full valuation allowance and, therefore, no benefit has been recognized for the ~~U.S.~~ net operating loss carryforwards and other deferred tax assets.

~~10. Stockholders’ Equity~~11. STOCKHOLDERS' EQUITY

Common ~~stock~~Stock

The Company’s amended and restated certificate of incorporation dated October 25, 2016, as amended, authorizes the Company to issue 100,000,000 shares of common stock with a par value of $0.001 per share and 5,000,000 shares of preferred stock with a par value of $0.001 per share. The holders of common stock are entitled to receive dividends whenever funds and assets are legally available and when declared by the ~~board of directors,~~Board, subject to the prior rights of holders of all series of convertible preferred stock outstanding. No dividends were declared through March 31, ~~2022.~~2023.

The Company had reserved shares of common stock for issuance as follows:


		March 31, 2022	December 31, 2021		March 31, 2023	December 31, 2022
Options issued and outstanding	Options issued and outstanding	480,764	504,106	Options issued and outstanding	311,497	328,193
Unvested restricted stock units		1,717,220	1,649,561
Unvested restricted stock units and performance-based restricted stock units				Unvested restricted stock units and performance-based restricted stock units	2,522,894	2,025,755
Shares available for grant under future stock plans	Shares available for grant under future stock plans	10,607,873	9,011,213	Shares available for grant under future stock plans	7,072,322	7,822,637
Shares available for future issuance	Shares available for future issuance	12,805,857	11,164,880	Shares available for future issuance	9,906,713	10,176,585

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

~~11. Equity Incentive Plans~~

~~Equity Incentive Plan Activity~~12. EQUITY INCENTIVE PLAN AND STOCK-BASED COMPENSATION

A summary of ~~share-based~~ awards available for grant under the Company’s 2016 Equity Incentive Plan is as follows:


			~~Awards~~Shares Available for Grant
Balance atas of December 31, ~~2020~~2022			~~6,505,390~~
~~Additional awards authorized~~			~~1,450,967~~7,822,637
Awards granted			~~(1,289,567)~~(869,619)
Awards forfeited			~~356,999~~
~~Awards withheld for tax purposes~~			~~135,886~~119,304
Balance ~~at December~~as of March 31, ~~2021~~2023			~~7,159,675~~
~~Additional awards authorized~~			~~1,474,686~~
~~Awards granted~~			~~(377,339)~~
~~Awards forfeited~~			~~56,908~~
~~Awards withheld for tax purposes~~			—
~~Balance at March 31, 2022~~			~~8,313,930~~7,072,322

~~During the three months ended March 31, 2022, 129~~Restricted Stock Units and Performance-Based Restricted Stock Units

The fair value of restricted stock units (“RSUs”) ~~were granted, 206,006 RSUs vested,~~ and ~~55,860 RSUs were forfeited.~~

~~The following table summarizes~~performance-based restricted stock ~~option activity under the 2006 and 2016 Equity Incentive Plans:~~

Options Outstanding
Options
Outstanding Weighted-
Average
Exercise
Price Per
Share Weighted-
Average
Remaining
Contractual
Life (years) Aggregate
Intrinsic Value
(in thousands)
Balance at December 31, 2020 609,881 $ 40.18 6.24 $ 120,163
Options exercised (90,939) $ 31.15
Options forfeited (14,836) $ 68.81
Balance at December 31, 2021 504,106 $ 40.97 5.20 $ 38,675
Options exercised (22,114) $ 48.63
Options forfeited (1,228) $ 84.54
Balances at March 31, 2022 480,764 $ 40.51 4.02 $ 56,232
Options exercisable – March 31, 2022 475,910 $ 40.06 3.99 $ 55,876
Options vested and expected to vest – March 31, 2022 480,687 $ 40.50 4.02 $ 56,227

~~The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the closing price of~~units ("PRSUs") are based on the Company’s ~~common stock.~~

~~The Company did not grant any options during~~closing stock price on the ~~three months ended March 31, 2022, and 2021.~~

~~IRHYTHM TECHNOLOGIES, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)~~

~~12. Stock-Based Compensation~~

~~Market-based RSU Valuation~~

date of grant. The fair value of market based ~~RSUs was~~PRSUs were estimated at the date of grant using the Monte-Carlo option pricing ~~model with the assumptions below. Additional details~~model. A summary is as follows:


	Restricted Stock Units			Performance Based Restricted Stock Units and Market-Based Units
	Shares Underlying RSUs	Weighted Average Grant Date Fair Value		Shares Underlying PRSUs 1	Weighted Average Grant Date Fair Value
Balance as of December 31, 2022	1,464,666	$	111.16	561,089	$	120.22
Granted	611,589	118.84		258,030	137.29
Vested	(228,894)	125.73		(24,282)	107.05
Forfeited	(55,690)	117.91		(63,614)	119.29
Balance as of March 31, 2023	1,791,671	$	111.71	731,223	$	126.76

1Based on the ~~Company's market~~maximum number of performance based ~~RSUs are included below.~~


	Three Months Ended March 31,
	~~2022~~
~~Expected term (in years)~~	~~2.88~~
~~Expected volatility~~	~~81.2~~	%
~~Risk-free interest rate~~	~~1.72~~	%
~~Dividend yield~~	—	%

~~Stock-Based Compensation~~

~~The following table summarizes the total stock-based compensation expense included~~restricted stock units in the ~~statements~~key executive grant agreements, the actual number of ~~operations and comprehensive loss for all periods presented (in thousands):~~

Three Months Ended
March 31,
2022 2021
Cost of revenue $ 386 $ 423
Research and development 1,495 1,659
Selling, general and administrative 12,022 18,148
Total stock-based compensation expense $ 13,903 $ 20,230
units granted will be based on the annual unit volume CAGR as described below.

As of March 31, ~~2022,~~2023, there was total unamortized compensation costs of ~~$0.3 million, net of estimated forfeitures, related to unvested stock options which the Company expects to recognize over a period of approximately 0.6 years, $139.4~~$157.2 million, net of estimated forfeitures, related to unrecognized RSU expense, which the Company expects to recognize over a weighted average period of ~~2.6 years, and $1.5~~2.0 years. Aggregate intrinsic value of the RSUs was $222.2 million as of March 31, 2023.

As of March 31, 2023, there was total unamortized compensation costs of $43.1 million, net of estimated forfeitures, related to unrecognized ~~ESPP~~PRSU expense, which the Company ~~will~~expects to recognize over ~~0.7~~a weighted average period of 2.4 years. Aggregate intrinsic value of the PRSUs was $90.7 million as of March 31, 2023.

~~Performance-based RSUs (“PRSU”)~~PRSUs and Market-based RSUs

The Company grants PRSUs to its key ~~executives of the Company.~~executives. PRSUs can be earned in accordance with the performance equity program for each respective grant.

For further details on PRSUs granted in 2022 and prior years, please refer to those disclosed in the financial statements accompanying the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 in Note 13, “

~~February 2020 Awards~~Equity Incentive Plans.”

In February ~~2020,~~2023, the ~~company~~Company granted PRSUs (“February ~~2020~~2023 awards”) ~~for~~to be earned based on the CAGR calculated between fiscal year 2025's and fiscal year 2022's annual unit volume ~~CAGR compared to fiscal year 2019's annual unit volume CAGR,~~and measuring a minimum performance threshold of ~~19.7%~~15% to earn ~~50%~~50.0% of target, and a maximum threshold of ~~29%~~25% achieved to earn ~~200%~~200.0% of target. ~~A total~~These February 2023 awards are subject to the recipient's continued employment through the vesting date of ~~133,834 PRSU shares were granted with grant date fair value of $11.0 million. The 2020 awards also include a service-based component.~~March 15, 2026.

Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March 31, 2023. During the three months ended March 31, 2022 and 2021, the Company recognized $0.1 million and $1.4 million of compensation cost, respectively, in connection with the February 2020 awards.

2221

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

~~January 2021 Awards~~

In ~~January 2021,~~addition, in February 2023, the Company granted market-based PRSUs ~~(“January 2021 awards”) for~~to Senior Executive Officers. These PRSUs to be earned will be based on the CAGR calculated between fiscal year ~~2021's annual consolidated revenue compared to~~2025's and fiscal year ~~2020's~~2022's annual ~~consolidated revenue,~~unit volume and measuring performance thresholds mentioned above, as well as a ~~performance threshold~~comparison of ~~10.0%~~the S&P Healthcare Index to ~~earn 100% of target. A total of 53,862 PRSU shares were granted with a~~the Company's TSR. The grant date fair value of ~~$13.9 million.~~ the TSR was based on the expected term of 2.9 years, interest risk free rate of 4.5%, implied volatility of 83.8% and no dividend yield. These February 2023 awards are subject to the Senior Executive Officers continued employment through the vesting date of March 15, 2026.

Options

The ~~January 2021 awards also include a service-based component.~~

~~Compensation cost in connection with~~following table summarizes stock option activity during the ~~probable number of shares that will vest will be recognized ratably through~~three months ended March 31, ~~2022.~~2023:


		Options Outstanding
	Options Outstanding	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)
Balance as of December 31, 2022	328,193	$	43.00	4.43	$	16,635
Options exercised	(16,696)	54.06
Balance as of March 31, 2023	311,497	42.41		4.16	25,425
Options exercisable – March 31, 2023	311,497	$	42.41	4.16	$	25,425

There have been no options granted since December 31, 2019. As of March 31, 2023, the options were fully vested.

Employee Stock Purchase Plan

In October 2016, the Company’s Board of Directors and stockholders approved the 2016 Employee Stock Purchase Plan (“ESPP”). The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP provides for 12 month offering periods that contain two six-month purchase periods. At the end of each purchase period, employees purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the purchase period. During the three months ended March 31, ~~2022~~2023, there was no purchase period and ~~2021,~~therefore no common stock was issued to employees participating in the ~~Company determined that it was probable that the January 2021 Awards would vest~~ESPP and ~~recognized $2.2 million of compensation cost for each of the three months ended March 31, 2022, and 2021 in connection with the January 2021 awards.~~

~~February 2021 Awards~~

In February 2021, the Company granted PRSU's (“February 2021 awards”) for fiscal year 2023's annual unit volume CAGR compared to fiscal year 2020's annual unit volume CAGR, measuring a minimum performance threshold of 19.7% to earn 50% of target, and a maximum threshold of 29% achieved to earn 200% of target. A total of 112,872 PRSU2,206,279 shares were ~~granted with grant date fair value of $17.3 million. The February 2021 awards also include a service-based component.~~available for issuance under the ESPP.

~~Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March 31, 2024.~~ During the three months ended March 31, ~~2022,~~2023 there were no material changes to the ESPP from those described in Note 13, Equity Incentive Plans, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

As of March 31, 2023, the Company ~~determined that it was probable that the February 2021 Awards would vest and recognized $0.9 million and $0.4~~had $3.4 million of unrecognized compensation ~~cost~~expense related to ESPP subscriptions that will be recognized over a weighted average period of 0.2 years.

Stock-Based Compensation Expense

The following table summarizes the total stock-based compensation expense included in the unaudited condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022 ~~and 2021, respectively, in connection with the February 2021 awards.~~(in thousands):

~~2022 Awards~~

In February 2022, the Company granted PRSU's (“2022 awards”) for fiscal year 2024's annual unit volume CAGR compared to fiscal year 2021's annual unit volume CAGR, measuring a minimum performance threshold of 13.0% to earn 50% of target, and a maximum threshold of 23.0% achieved to earn 200% of target. A total of 170,997 PRSU shares were granted with grant date fair value of $21.8 million. The 2022 awards also include a service-based component.

Compensation cost in connection with the probable number of shares that will vest will be recognized ratably through March 31, 2025. During the three months ended March 31, 2022, the Company determined that it was probable that the 2022 Awards would vest and recognized $0.7 million of compensation cost for the three months ended March 31, 2022, in connection with the 2022 awards.

The Company's Chief Executive Officer's 2022 awards included a multiplier based on total shareholder return (“TSR”). The number of RSUs that vest, determined in accordance with the performance metrics above, will be adjusted for certain levels of achievement of TSR by the Company, as compared to the TSR achieved by the companies comprising the Index.

~~Non-employee Stock-Based Compensation~~

On January 12, 2021, the Company's former Chief Executive Officer (“CEO”) resigned and entered into a Consulting Professional Services Agreement ("CPSA") with the Company. Pursuant to the original terms of the awards, the former CEO will continue to vest in outstanding awards as long as services are provided to the Company under the CPSA as a non-employee consultant or a member of the Company's Board of Directors. In accordance with ASC 718, the Company recognized expense related to all awards expected to vest over the duration of the CPSA in the three months ended March 31, 2021, as an equity-based severance cost as the consulting services are not substantive.

~~Total expense related to non-employee stock-based compensation recognized for the three months ended March 31, 2021 was $5.0 million.~~

In March 2022, the former CEO retired from the Board and as a non-employee consultant. Vesting for all outstanding awards was accelerated upon his retirement. The Company recognized expense of $0.9 million related to the retirement of the former CEO during the three months ended March 31, 2022.


	Three Months Ended March 31,
		2023		2022
Cost of revenue		$	564	$	386
Research and development		2,387		1,495
Selling, general and administrative		15,300		12,022
Total stock-based compensation expense		$	18,251	$	13,903

2322

IRHYTHM TECHNOLOGIES, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

13. ~~Net Loss Per Common Share~~NET LOSS PER SHARE

As the Company ~~has~~had net losses for the three months ended March 31, ~~2022,~~2023 and ~~2021,~~2022, all potential common shares were ~~deemed~~determined to be anti-dilutive. The following table sets forth the computation of the basic and diluted net loss per share during the three months ended March 31, 2023 and 2022 (in thousands, except ~~share and~~ per share data):

Three Months Ended
March 31,
2022 2021
Numerator:
Net loss $ (50,609) $ (27,779)
Denominator:
Weighted-average shares used to compute net loss per common share, basic and diluted 29,596,325 29,164,430
Net loss per common share, basic and diluted $ (1.71) $ (0.95)


	Three Months Ended March 31,
		2023		2022
Numerator:
Net loss		$	(39,109)	$	(50,609)
Denominator:
Weighted-average shares used to compute net loss per common share, basic and diluted		30,297		29,596
Net loss per common share, basic and diluted		$	(1.29)	$	(1.71)

The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per common share for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022 because their inclusion would be ~~anti-dilutive:~~anti-dilutive (in thousands):


		Three Months Ended March 31,			Three Months Ended March 31,
		2022	2021		2023	2022
Options to purchase common stock	Options to purchase common stock	480,764	553,064	Options to purchase common stock	311	481
PRSUs and RSUs unvested		1,717,220	1,212,423
RSUs and PRSUs unvested				RSUs and PRSUs unvested	2,523	1,717
Total	Total	2,197,984	1,765,487	Total	2,834	2,198

2423

~~IRHYTHM TECHNOLOGIES, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited financial statements and related notes included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Quarterly Report on Form 10-Q entitled “Risk ~~Factors".~~Factors."

Overview

We are a leading digital healthcare company ~~redefining~~that creates trusted solutions that detect, predict, and prevent disease. Our principal business is the ~~way cardiac arrhythmias are clinically diagnosed by combining our wearable biosensing~~design, development, and commercialization of device-based technology ~~with cloud-based data analytics and deep-learning capabilities. Our goal is~~ to ~~be the leading provider of ambulatory electrocardiogram (“ECG”) monitoring for patients at risk for arrhythmias. We have created a full portfolio of ambulatory~~provide remote cardiac monitoring services that we believe allow clinicians to diagnose certain arrhythmias quicker and with greater efficiency than other services that rely on traditional technology.

Each Zio System combines a ~~unique platform, called~~wire-free, patch-based, 14-day wearable biosensor that continuously records ECG data with a proprietary cloud-based data analytic software to help physicians monitor patients and diagnose arrhythmias. Since receiving FDA clearance, we have provided the Zio ~~service, which combines an easy-to-wear~~Services to over six million patients and ~~unobtrusive biosensor that can be worn for up to 14 consecutive days with powerful proprietary algorithms that distill data from millions~~have collected over one billion hours of ~~heartbeats into clinically actionable information. The Zio service consists of:~~curated heartbeat data.

•wearable patch-based biosensors, Zio XT and Zio AT monitors, which continuously record and store ECG data from every patient's heartbeat for up to 14 consecutive days; Zio AT offers the option of timely, detection based transmission of data during the prescribed wear period;

•Since first receiving clearance from the FDA for our technology in 2009, we have supported physician and patient use of our technology and provided remote cardiac monitoring services from our Medicare-enrolled IDTFs and our qualified technicians.~~cloud-based analysis of the recorded cardiac rhythms~~We have provided our Zio Services using our ~~proprietary, deep-learned algorithms;~~

•~~a final quality assessment review of the data by our certified cardiographic technicians; and~~

•~~an easy-to-read~~ Zio report, a curated summary of findings that includes high quality and clinically-actionable information which is sent directly to a patient’s physician through ZioSuite and can be integrated into a patient’s electronic health record.Systems.

We receive revenue for the Zio ~~service~~Services primarily from third-party payors, which include ~~commercial~~contracted third-party payors and ~~government agencies, such as CMS, Veterans Administration, and the military. In addition, a small percentage~~CMS. The remainder of our revenue comes from healthcare institutions, which are typically hospitals or private physician practices, who purchase the Zio ~~service~~Services from us directly. Our revenue in the third-party commercial payor category is primarily contracted, which means we have entered into pricing contracts with these payors. Third-party contracted payors accounted for approximately 56% and 63% of our revenue for the three months ended March 31, 2022 and 2021, respectively. Approximately 22% and 14% of our total revenue for the three months ended March 31, 2022 and 2021, respectively, is received from Centers for Medicare and Medicaid Services ("CMS"), which is under established reimbursement codes. Healthcare institutions, which are typically hospitals or private physician practices accounted for approximately 16% and 17% of our revenue for each of the three months ended March 31, 2022 and 2021, respectively. Non-contracted third party payors and self-pay accounted for 6% and 7% of our total revenue for the three months ended March 31, 2022 and March 31, 2021, respectively. We rely on a third-party billing ~~partner, XIFIN, Inc.,~~partners to submit patient claims and collect from commercial payors, certain government agencies, and patients.

~~Since our~~The following are Zio ~~service was cleared by the U.S. Food and Drug Administration (“FDA”), we have provided the Zio service to over four million patients and have collected over one billion hours~~Services shown as a percentage of curated heartbeat data. We believe the Zio service is well-positioned to penetrate an already-established approximately $2.0 billion U.S. ambulatory cardiac monitoring market by offering a user-friendly device to patients, actionable information to physicians and value to payors.revenue:

We market our ambulatory cardiac monitoring solution in the United States through a direct sales organization comprised of sales management, field billing specialists, quota-carrying sales representatives, and a customer service team. Our sales representatives focus on initial introduction into new customers, penetration across a sales region, driving adoption within existing accounts and conveying our message of clinical and economic value to service line managers and hospital administrators and other clinical departments. In addition, we will continue exploring sales and marketing expansion opportunities in international geographies.


	Three Months Ended March 31,
	2023	2022
Contracted third-party payors	56%	56%
Centers for Medicare and Medicaid	24%	22%
Healthcare institutions	14%	16%
Non-contracted third party payors	6%	6%

Key Business Metric

Non-GAAP Financial Measure

Adjusted EBITDA is a key measure we use to assess our financial performance and it is also used for internal planning and forecasting purposes. We believe Adjusted EBITDA is helpful to investors, analysts and other interested parties because it can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. In addition, this measure is frequently used by analysts, investors and other interested parties to evaluate and assess performance.

We define Adjusted EBITDA for a particular period as net loss or income before interest, taxes, depreciation and amortization, interest expense and interest income and as further adjusted for stock-based compensation expense, impairment and restructuring charges and transformation costs. Transformation costs include one-time professional services and severance costs to augment and restructure the organization to use both outsourced and offshore resources.

~~COVID-19 Impact~~Adjusted EBITDA is a non-GAAP financial measure and is presented for supplemental informational purposes only and should not be considered as an alternative or substitute to financial information presented in accordance with GAAP. This measure has certain limitations in that it does not include the impact of certain expenses that are reflected in our unaudited consolidated statements of operations that are necessary to run our business. Other companies, including other companies in our industry, may not use this measure or may calculate this measures differently than as presented in this Quarterly Report on Form 10-Q, limiting their usefulness as a comparative measure.

~~Beginning~~The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated in mid-March 2020, we experienced decreasing levels in the Zio service patient registrations which impacted our revenues during the years ended December 31, 2021 and 2020. This decrease in revenue is due to a variety of challenges associatedaccordance with ~~the COVID-19 pandemic~~generally accepted accounting principles in the United States of America (“GAAP”), to Adjusted EBITDA (in thousands):


	Three Months Ended March 31,
	2023		2022
Net loss	$	(39,109)	$	(50,609)
Income tax provision	87		47
Depreciation and amortization	3,576		3,143
Interest expense	950		2,029
Interest income	(1,434)		(132)
Stock-based compensation	18,251		13,903
Impairment and restructuring charges	—		26,608
Transformation costs	5,686		258
Adjusted EBITDA	$	(11,993)	$	(4,753)

Macroeconomic Factors and the Effects of COVID-19

Our future results of operations and liquidity could be materially adversely affected by macroeconomic factors contributing to delays in payments of outstanding receivables, supply chain disruptions, including ~~among others:~~shortages and inflationary pressure, uncertain or reduced demand, and the impact of any initiatives or programs that we may undertake to address financial and operational challenges faced by our customers.

•~~a reduction in physician prescriptions for~~We have experienced business disruptions affecting the availability and cost of materials, which has impacted our supply chain and reduced margins, from the COVID-19 pandemic. In addition, we have continued to deliver our Zio ~~service due to:~~Services by operating with remote employees and essential employees on site.

◦The current macroeconomic environment is impacting our customers, both financially and operationally. Hospitals are experiencing staffing shortages and supply chain issues that could affect their ability to provide patient care. Additionally, hospitals are facing significant financial pressure as supply chain constraints and inflation drive up operating costs, rising interest rates make access to credit more expensive, unrealized losses decrease available cash reserves, and fiscal stimulus programs enacted during the COVID-19 pandemic wind down. As a ~~reduction in diagnostic testing outside of those tests related to severe respiratory distress;~~

◦~~reduction in the hours of most physicians’ offices;~~

◦~~physicians and hospitals prioritizing the treatment of critically ill patients; and~~

◦~~patient reluctance to visit physicians or hospitals for fear of contracting COVID-19;~~

•~~cancellation and reduction of physician attendance at professional medical society meetings and trade shows and our decision not to attend them;~~

•travel restrictions and changing hospital policies that have limited access of our sales professionals to hospitals where the Zio services are prescribed and where patients have historically been enrolled;

•~~delays in receiving Zio XT back from patients with some patients not returning the device at all; and~~

•~~patients who have lost jobs, been furloughed, have reduced work hours or are worried about the continuation of medical insurance being unable to afford the Zio service.~~

As of March 31, 2022, we re-opened our offices for use and certain groups of employees have begun returning to work in our offices across the United States. Appropriate social distancing techniques and other measures at our facilities have been implemented for the employees who have returned to work.

~~While hospital systems and healthcare facilities shift their focus and resources to treating COVID-19 patients and combating the spread~~consequence of the ~~coronavirus, we~~financial pressures and decreased profitability, some hospitals have indicated that they are lowering their capital investment plans and tightening their operational budgets.

We have adapted our ~~service~~Zio Services to meet the immediate needs of physicians, customers, and patients and significantly increased the utilization of our home enrollment service, which allows patients to receive and wear the single-use Zio ~~device~~patch without going to a healthcare facility.

Our remote work arrangements ~~resulting from the COVID-19 pandemic~~ and subsequent decision to pursue a sublease for the 5th floor of our San Francisco headquarters caused us to recognize an impairment on our ~~right of use~~right-of-use asset and related leasehold improvements and furniture and fixtures during the three months ended March 31, 2022 and we believe we may incur additional impairment charges related to our real property lease agreements.

~~Components of Results of Operations~~

Revenue

The majority of our revenue is derived from provision of our Zio ~~service~~Services to customers in the United States. We earn revenue from the provision of our Zio ~~service~~Services primarily from contracted third-party payors, CMS and healthcare institutions. ~~In addition, a~~A small percentage of ~~institutions, which are typically hospitals or private physician practices, purchase the Zio service~~our revenue is from ~~us directly, and a very small percentage of commercial~~ non-contracted third-party payors.

We recognize revenue on an accrual basis based on estimates of the amount that will ultimately be realized, which is the difference between the amount submitted for payment and the amount received. These estimates require significant judgment by management. In determining the amount to accrue for the Zio Services (including a delivered ~~report, and Zio service provided,~~report), we consider factors such as claim payment history from both payors and patient, ~~out-of-pocket costs, payor coverage,~~available reimbursement, including whether there is a contract between us and the payor or healthcare institution and ~~the Company,~~ historical amount received for the service, and any current developments or changes that could impact reimbursement and healthcare institution payments.

We ~~are subject to seasonality similar to other companies in our field,~~typically experience reduced revenue during the third quarter, as ~~vacations by~~well as during the year-end holiday season.We believe this is the result of physicians and patients ~~tend~~taking vacations and patients electing to ~~affect enrollment in the Zio service more~~delay our monitoring services during the summer months ~~and during the end of calendar year holidays compared to other times of the year.~~or holidays. Revenue may be impacted by the outcome of adjudications with contracted and non-contracted payors, as well as changes in ~~the~~ CMS reimbursement ~~rates.~~rates like we experienced with final rates being established for our Zio Services as of January 1, 2023. Clinical capacity limitations may also restrict our ability to complete the performance obligations to achieve revenue recognition.

Cost of Revenue and Gross Margin

Cost of revenue includes direct labor, material costs, equipment and infrastructure expenses, ~~device scrap and loss,~~ amortization of internal-use software, allocated overhead, and shipping and handling. Direct labor includes ~~payroll and personnel-related~~payroll-related costs including stock-based compensation involved in manufacturing, clinical data curation, and customer service. Material costs include both the disposable materials costs of the Zio ~~monitors~~patches and amortization of the ~~reusable~~re-usable printed circuit board assemblies (“PCBAs”). Each Zio XT ~~monitor~~patches includes a PCBA, and each Zio AT ~~monitor~~patch includes a PCBA and gateway board, the cost of which is amortized over the anticipated number of uses of the board. We expect ~~the~~ cost of revenue to increase in absolute dollars as our revenue increases due to increased direct labor, direct materials, and variable spending as well as amortization of internal-use software, partially offset by economies of scale in relation to fixed costs such as overhead ~~depreciation and amortization,~~ and facilities costs.

We calculate gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, including increased contracting with third-party payors and institutional providers. We have in the past been able to increase our pricing as third-party payors become more familiar with the benefits of the Zio ~~service~~Services and move to contracted pricing arrangements. We expect to continue to ~~decrease~~increase the cost of revenue per device by obtaining volume purchase discounts for our material costs, implementing scan-time algorithm and process improvements, automating manufacturing assembly and packaging, and software-driven and other workflow enhancementsdue to ~~reduce labor costs. These decreases have been offset by~~ increases to materials and electronics components pricing, labor rates, shipping rates, ~~depreciation and~~ amortization of ~~investments,~~capitalized internal-use software, and increases in the general level of ~~inflation.~~

~~Although a large majority of~~inflation, partially offset by reduced costs from obtaining volume purchase discounts for our ~~commercial customers have renewed their contracts for the Zio XT service since the establishment of the Category I codes on January 1, 2021 matching~~material costs, implementing scan-time algorithms and process improvements, automating manufacturing assembly and packaging, and through software-driven and other workflow enhancements to pre-existing rates, if we are unsuccessful in improving the Medicare rates, we believe that commercial rates may begin to be more negatively impacted, which would have a negative impact on our gross margins.reduce labor costs.

Research and Development Expenses

We expense research and development costs as they are incurred. Research and development expenses include ~~payroll and personnel-related~~payroll-related costs, including stock-based compensation, consulting services, clinical studies, laboratory supplies and allocated facility overhead costs. In addition, we expense milestone payments, when probable, for the development agreement with Verily. We expect our research and development costs to increase in absolute dollars as we hire additional personnel to develop new product and service offerings, product enhancements, and clinical evidence.

Selling, General and Administrative Expenses

Our sales and marketing expenses consist of ~~payroll and personnel-related~~payroll-related costs, including stock-based compensation, sales commissions, travel expenses, consulting, public relations costs, direct marketing, tradeshow and promotional expenses, and allocated facility overhead costs.

Our general and administrative expenses consist primarily of ~~payroll and personnel-related~~payroll-related costs for executive, finance, legal and administrative personnel, including stock-based compensation. Other significant expenses include professional fees for legal and accounting services, consulting fees, recruiting fees, bad debt expense, third-party patient claims processing fees, and travel expenses.

~~Impairment~~ In addition, we incurred transformation costs to scale our organization during the year and ~~Restructuring Expenses~~

~~Our impairment and~~expect to incur additional transformation costs throughout 2023 with the restructuring ~~expenses consist of impairment charges on~~activities to be substantially complete by mid-2024. Upon completion, we expect to achieve operational efficiencies in our ~~San Francisco right-of-use asset and severance charges in connection with our 2022 restructuring plan.~~

~~Interest Expense~~administrative expenses.

Interest expense is attributable to borrowings under our loan agreements. See Note 9,~~Note 8.~~ Debt, in the Notes to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our loan agreements.

Other Income, Net

Other income, net consists primarily of interest income which consists of interest received on our cash and cash equivalents and ~~investments.~~short-term investments and foreign exchange gain or loss from our UK subsidiary.

Results of Operations

The following table sets forth, for the periods indicated, certain unaudited consolidated statements of income information:


	Three Months Ended March 31,
	2023		% Revenue	2022		% Revenue
	(dollars in thousands, except percentages)
Revenue	$	111,436	100%	$	92,378	100%
Cost of revenue	35,755		32%	30,619		33%
Gross profit	75,681		68%	61,759		67%
Operating expenses:
Research and development	14,842		13%	10,542		11%
Selling, general and administrative	100,343		90%	73,158		79%
Impairment and restructuring charges	—		—%	26,608		29%
Total operating expenses	115,185		103%	110,308		119%
Loss from operations	(39,504)		(35)%	(48,549)		(53)%
Interest expense	(950)		(1)%	(2,029)		(2)%
Other income, net	1,432		1%	16		—%
Loss before income taxes	(39,022)		(35)%	(50,562)		(55)%
Income tax provision	87		—%	47		—%
Net loss	$	(39,109)	(35)%	$	(50,609)	(55)%

~~Results of Operations~~

Comparison of the Three Months Ended March 31, ~~2022~~2023 and ~~2021~~2022


	Three Months Ended March 31,
	2023		2022		$ Change		% Change

	(dollars in thousands, except percentages)
Revenue	$	111,436	$	92,378	$	19,058	21%
Cost of revenue	35,755		30,619		5,136		17%
Gross profit	75,681		61,759		13,922		23%
Operating expenses:
Research and development	14,842		10,542		4,300		41%
Selling, general and administrative	100,343		73,158		27,185		37%
Impairment and restructuring charges	—		26,608		(26,608)		(100)%
Total operating expenses	115,185		110,308		4,877		4%
Loss from operations	(39,504)		(48,549)		9,045		(19)%
Interest expense	(950)		(2,029)		1,079		(53)%
Other income, net	1,432		16		1,416		nm
Loss before income taxes	(39,022)		(50,562)		11,540		(23)%
Income tax provision	87		47		40		85%
Net loss	$	(39,109)	$	(50,609)	$	11,500	(23)%

nm- percentage change not meaningful
Three Months Ended March 31,
2022 2021 $ Change % Change
Revenue $ 92,378 $ 74,311 $ 18,067 24 %
Cost of revenue 30,619 23,458 7,161 31 %
Gross profit 61,759 50,853 10,906 21 %
Gross margin 67 % 68 %
Operating expenses:
Research and development 10,542 8,510 2,032 24 %
Selling, general and administrative 73,158 69,813 3,345 5 %
Impairment and restructuring charges 26,608 — 26,608 —
Total operating expenses 110,308 78,323 31,985 41 %
Loss from operations (48,549) (27,470) (21,079) 77 %
Interest expense (2,029) (335) (1,694) 506 %
Other income, net 16 124 (108) (87) %
Loss before income taxes (50,562) (27,681) (22,881) 83 %
Income tax provision 47 98 (51) (52) %
Net loss $ (50,609) $ (27,779) $ (22,830) 82 %

Revenue

Revenue increased ~~$18.1~~$19.1 million, or ~~24%~~21%, to $111.4 million during the three months ended March 31, 2023 from $92.4 million during the three months ended March 31, ~~2022 from $74.3 million during the three months ended March 31, 2021.~~2022. The increase in revenue was primarily attributable to the increase in volume of the Zio ~~services~~Services provided as a result of increased demand ~~from our customers~~ and in improved CMS reimbursement ~~rates. Revenue was also impacted~~rates, partially offset by ~~improvements~~a decline in ~~adjudication performance~~net average selling price and an increase in contractual allowance with contracted and non-contracted payors.

Cost of Revenue and Gross Margin

Cost of revenue increased ~~$7.2~~$5.1 million, or ~~31%~~17%, to $35.8 million during the three months ended March 31, 2023 from $30.6 million during the three months ended March 31, ~~2022 from $23.5 million during the three months ended March 31, 2021.~~2022. The increase in cost of revenue was primarily due to ~~increased~~higher volume of Zio ~~service volume,~~Services and ~~an increase in costs resulting from capacity limitations associated with clinical operations.~~

higher material and freight costs.

Gross margin for the three months ended March 31, ~~2022 was 67%~~2023 increased to 68%, compared to ~~68%~~67% for the three months ended March 31, ~~2021.~~2022. The ~~decrease~~increase in gross margin iswas primarily due to ~~increased~~lower fixed costs ~~associated with capacity constraints, with limited impact of~~per unit driven by higher ~~Zio AT~~unit volumes, ~~and COVID-related labor costs,~~partially offset by ~~volume benefit~~higher material and ~~increase in average selling price.~~

freight costs.

Research and Development Expenses

Research and development expenses increased ~~$2.0~~$4.3 million, or ~~24%~~41%, to $14.8 million during the three months ended March 31, 2023 from $10.5 million during the three months ended March 31, ~~2022 from $8.5 million during the three months ended March 31, 2021.~~2022. The increase was primarily attributable to ~~a $3.4~~an increase of $4.8 million in payroll-related costs, including stock-based compensation, an increase of $1.3 million in ~~compensation expense,~~rent and other facilities costs, partially offset by ~~a $1.4 million reduction of expense due to~~ an increase of $1.8 million in costs capitalized ~~to internal use~~for internal-use software.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased ~~$3.3~~$27.2 million, or 5%37%, to $100.3 million during the three months ended March 31, 2023 from $73.2 million during the three months ended March 31, ~~2022 from $69.8 million during the three months ended March 31, 2021.~~2022. The increase was ~~due~~primarily attributable to ~~a $8.0~~an increase of $13.3 million ~~increase~~ in payroll related costs including employee stock-based compensation ~~costs~~ as a result of increased headcount and ~~corporate bonus,~~executive hires to support the growth in our operations, an increase of $5.7 million in transformation costs to scale the organization, an increase of $3.5 million of travel and general office expenses, an increase of $2.5 million in professional service fees, an increase of $1.1 million related to increased marketing costs and an increase of $1.0 million of bad debt expense ~~of $1.3 million, partially offset by a $6.0 million decrease in stock based compensation expense.~~related to revenue growth.

Impairment and Restructuring Charges

There were no impairment and restructuring charges during the three months ended in March 31, 2023.In February 2022, our board of directors (the “Board”) approved reducing our leased space for our headquarters in San Francisco, California. As a result, we recognized an impairment of our ~~right of use~~right-of-use (“ROU”) asset and related leasehold improvements and furniture and fixtures in the amount of $23.2 ~~million.~~

Inmillion during the three months ended March 31, 2022. Also in February 2022, the ~~board~~Board approved a restructuring plan to allow the Company to effectively and efficiently scale its ~~business. The 2022 Restructuring Plan~~business, which resulted in severance and other employment related ~~costs. We recorded~~costs of $3.4 million ~~in charges under the 2022 Restructuring plan~~ during the three months ended March 31, 2022.

~~Interest Expense~~

Interest expense ~~was $2.0~~and other income, net

Interest expense decreased by $1.1 million ~~for~~to $1.0 million during the three months ended March 31, ~~2022, compared to $0.3~~2023 from $2.0 million ~~for~~during the three months ended March 31, ~~2021. The increase was~~2022 due to additional financing fees of $1.75 million ~~related to our term loan paid in the three months ended March 31, 2022, compared with the three months ended March 31, 2021.~~

~~Other Income, Net~~

~~Other income, net was immaterial for the three months ended March 31, 2022 and 2021. There were no significant changes in other income, net~~expensed during the three months ended March 31, ~~2022, compared with~~2022; no such expenses were incurred during the three months ended March 31, ~~2021.~~2023. This benefit was partially offset by higher interest expense of $0.6 million.

Other income, net increased by $1.4 million. The increase is primarily due to higher interest earned because of rising interest rates from our cash and cash equivalents and short-term investments during the three months ended March 31, 2023.

Liquidity and Capital Expenditures

Overview

As of March 31, 2023, we had cash and cash equivalents of $52.8 million, short-term investments of $123.5 million , and accounts receivable of $49.6 million. In addition, we have $40.0 million available under a term loans facility and $16.6 million under a revolving credit line. We are continuously reviewing our liquidity and anticipated capital requirements in light of the significant uncertainty created by the current macroeconomic environment, including inflation, rising interest rates, instability in the global banking system, and the COVID-19 global pandemic. We believe wethat our current cash, cash equivalents, short-term investment balances, and term loans facility, together with income to be derived from the sales of our Zio Services, will ~~have adequate liquidity over the next twelve months to operate our business and~~be sufficient to meet our ~~cash requirements.~~

As of March 31, 2022, we had cash and cash equivalents of $94.8 million, short-term investments of $114.0 million, and an accumulated deficit of $456.7 million. In addition, we have term loan facilities of $40.0 million and a revolving credit line of $25.0 million available.liquidity requirements for the foreseeable future.

Our expected future capital requirements may depend on many factors, including ~~expanding~~the expansion of our customer base, the expansion of our ~~salesforce,~~sales force, and the timing and extent of spending on the development of our technology to increase our ~~product~~service offerings. We expect the next Verily milestone payment of $1.75 million to be ~~met in 2023. Additionally, we will complete the build out of our new manufacturing facility and our new Deerfield Illinois facility~~due in the ~~first~~second half of ~~2022.~~

If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.

~~Cash Flows~~2023.

The following table summarizes our cash flows for the periods indicated (in thousands):


		Three months ended March 31,					Three Months Ended March 31,
		2022		2021			2023		2022
Net cash (used in) provided by:	Net cash (used in) provided by:					Net cash (used in) provided by:
Operating activities	Operating activities	$	(38,885)	$	(41,842)	Operating activities	$	(30,753)	$	(38,885)
Investing activities	Investing activities	(8,527)		117,035		Investing activities	3,820		(8,527)
Financing activities	Financing activities	14,636		(26,446)		Financing activities	905		14,636
Net increase in cash and cash equivalents		$	(32,776)	$	48,747
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	$	(26,028)	$	(32,776)

~~Cash Used in~~ Operating Activities

During the three months ended March 31, 2023, cash used in operating activities was $30.8 million and consisted of a net loss of $39.1 million, adjusted by non-cash charges of $43.7 million and a net decrease of $35.3 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of a change in allowance for doubtful accounts and contractual allowance of $21.4 million, stock-based compensation expense of $18.3 million, depreciation and amortization expense of $3.6 million and amortization of ROU assets of $1.4 million. The net decrease in our net operating assets and liabilities was primarily due to an increase of $21.1 million in accounts receivable, a decrease in accrued liabilities of $11.2 million primarily due to the payment of employee and executive bonuses during the three months ended March 31, 2023, an increase in prepaid expenses and other assets of $4.2 million and an increase of $1.4 million in inventory. These decreases in net operating assets and liabilities were partially offset by an increase in accounts payable of $2.3 million.

During the three months ended March 31, 2022, cash used in operating activities was $38.9 million, which consisted of a net loss of $50.6 million, adjusted by non-cash charges of $61.2 million and a net ~~change~~decrease of $49.5 million in our net operating assets and liabilities. The non-cash charges were primarily comprised of impairment charges of $23.2 million, ~~stock-based compensation expense of $13.9 million,~~ allowance for doubtful accounts and contractual allowances of $14.0 million, stock-based compensation expense of $13.9 million, amortization of ROU assets of $6.5 million and depreciation and amortization of $3.1 ~~million and amortization of right of use assets of $6.5~~ million. The ~~change~~decrease in our net operating assets and liabilities was primarily due to an increase of $22.9 million in accounts receivable, ~~an increase of $2.4 million in inventory,~~ a decrease of $9.4 million in accrued liabilities, ~~an increase of $5.3 million in accounts payable and~~ a decrease of $6.2 million in operating lease ~~liability.~~liabilities, a decrease of $5.3 million in accounts payable, and an increase of $2.4 million in inventory.

The number of claims from the first half of 2021 which contained differences between the submitted price and reimbursement and overall denials increased significantly compared to our historical experience as a result of CPT code transition issues with the payors. We continue to work with the payors to collect on these claims and the collection cycle for these claims is significantly longer than usual. While we believe we have properly estimated the impact to our contractual allowances and allowance for doubtful accounts, the inherent uncertainty caused by longer collection cycle and claims adjudication process could result in additional provisions for contractual allowances and doubtful accounts which would negatively impact our results of operations in future periods. As of March 31, 2022, uncollected claims as a result of the CPT code transition were $12.9 million. We believe we have adequate balance sheet liquidity to manage through these delaysInvesting Activities

During the three months ended March 31, ~~2021,~~2023, cash ~~used in operating~~provided by investing activities was ~~$41.8 million, which consisted of a net loss of $27.8 million, adjusted by non-cash charges of $34.1~~$3.8 million, and ~~a net change~~consisted primarily of ~~$48.2~~$46.0 million received from the maturities of short-term investments, partially offset by $33.8 million purchases of short-term investments and $8.4 million in ~~our net operating assets and liabilities. The non-cash charges were primarily comprised~~capital expenditures, which included $6.2 million of a change in stock-based compensation of $20.2 million, allowance for doubtful accounts and contractual allowances of $9.8 million, depreciation and amortization of $2.0 million and amortization of right of use assets of $1.6 million. The change in our net operating assets and liabilities was primarily due to an increase of $39.8 million in accounts receivable, a decrease of $6.1 million in accrued liabilities, a decrease of $0.7 million in accounts payable and a decrease of $1.4 million in operating lease liability.capitalized internal-use software.

~~Cash Provided by Investing Activities~~

~~Cash used in investing activities during~~During the three months ended March 31, 2022, cash used in investing activities was $8.5 million, ~~which~~and consisted primarily ~~consisted~~ of $46.0 million in purchases of ~~available for sale~~short-term investments and $5.6 million of capital expenditures, which included $5.0 million of capitalized internal-use software, partially offset by ~~cash~~$43.0 million received from the sale and maturities of ~~available for sale investments of $28.0 million, and sales of available for sale investments of $15.0 million.~~short-term investments.

~~Cash provided by investing activities during~~Financing Activities

During the three months ended March 31, ~~2021~~2023, cash provided by financing activities was ~~$117.0~~$0.9 million, ~~which consisted~~from proceeds for the issuance of ~~cash received from the maturities of available for sale investments of $151.3 million, partially offset by $30.1 million~~common stock in ~~purchases of available for sale investments and $4.2 million of capital expenditures.~~

~~Cash Used in Financing Activities~~connection with employee option exercises.

During the three months ended March 31, 2022, cash provided by financing activities was $14.6 million, primarily due to $35.0 million in proceeds ~~received from the closing~~ of ~~our Second Amendment to our SVB Loan Agreement, partially offset by $21.4~~a term loan and $1.0 million ~~of repayment of the outstanding balance under the existing SVB term loan.~~

During the three months ended March 31, 2021, cash used in financing activities was $26.4 million, primarily due to $25.1 million in tax withholding upon the vesting of RSUs. This practice has been updated to require employees to sell shares to cover tax liabilities. In addition, cash used in financing activities was due to repayment of debt of $2.9 million, partially offset by $1.6 million in proceeds from the issuance of common stock in connection with employee ~~options~~option exercises, ~~and our Employee Stock Purchase Plan.~~partially offset by a $21.4 million repayment of long-term debt.

Indebtedness

Bank Debt

In October 2018, we entered into athe Third Amended and Restated Loan and Security Agreement with ~~SVB (“SVB Loan Agreement”).~~SVB. Under the SVB Loan Agreement, we had borrowed $35.0 million and had made repayments through March 2022, at which time the outstanding balance was $18.5 million.

On March 28, 2022, we entered into a Second Amendment ~~(“2022~~(the “2022 Amendment”) to ~~the~~our SVB Loan Agreement which provided for a term ~~loan~~loans facility in the aggregate principal amount of up to $75.0 million (the “2022 Term Loans”), of which $35.0 million ~~aggregate principal amount~~ was borrowed at closing and a portion of the proceeds ~~of which were~~was used to pay in full the outstanding balance of $18.5 million ofunder the SVB Loan Agreement. The remaining $40.0 million of 2022 Term Loans may be borrowed from time to time at our option, in increments of at least $10.0 million, through December 31, 2023. We will pay interest only on the 2022 Term Loans until April 1, 2025, when we ~~shall~~will commence repaying the 2022 Term Loans in 24 equal consecutive monthly installments, with all obligations under the 2022 Term Loans maturing on March 1, 2027. Interest charged on the 2022 Term Loans ~~accrues~~will accrue at a floating per annum rate equal to the greater ofof: (A) the Prime Rate plus 0.25%; and (B) 3.50%. We are also required to pay fees on any prepayment of the 2022 Term Loans, ranging from 3.0% to 1.0% depending on the date of prepayment, and a final payment equal to 5.0% of the principal amount of the 2022 Term Loans ~~made.~~drawn. Once repaid or prepaid, the 2022 Term Loans may not be reborrowed.

The 2022 Amendment also amended the terms of the revolving credit line under the SVB Loan Agreement, which provided for an aggregate principal amount of $25.0 million, toto: (i) extend the maturity date from August 1, 2023 to March 1, 2027, (ii) increase the letters of credit sublimit to $15.0 million and (iii) increase the cash management services sublimit to $15.0 million. Interest charged on the principal amount outstanding under the revolving credit line ~~shall~~will accrue at a floating per annum rate equal to the greater of (A) the Prime Rate plus 0.25% and (B) 3.50%. We are required to pay an annual fee equal to 0.15% of the revolving credit line. As of March 31, ~~2022,~~2023, no loans were outstanding under the revolving credit ~~line.~~line and the Company used $8.4 million in letters of credit.

~~Off-Balance Sheet Arrangements~~The 2022 Amendment also amended the SVB Loan Agreement to require us to comply, as of the last day of each fiscal quarter, with a quick ratio of at least 1.15 to 1.0 or minimum adjusted EBITDA trailing six months of at least $15.0 million.

On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver. On March 12, 2023, the U.S. Department of the Treasury, Federal Reserve Board, and FDIC released a joint statement announcing that the FDIC would complete its resolution of SVB in a manner that fully protected all depositors at SVB and that depositors would have access to all of their money starting March 13, 2023. On March 26, 2023, it was announced that First-Citizens Bank & Trust Company would assume all of SVB’s deposits and loans as of March 27, 2023. We continue to have ~~not entered into any off-balance sheet arrangements~~access to the revolving credit line and ~~do not have any holdings~~letters of credit available pursuant to the SVB Loan Agreement and we were in ~~variable interest entities.~~compliance with our loan covenants as of March 31, 2023.

Contractual Obligations

Our contractual obligations as of December 31, ~~2021~~2022, are presented in our Annual Report on Form 10-K filed with the SEC on February ~~28, 2022. There have been no material changes.~~23, 2023. See Note 8, Commitments and Contingencies to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for our lease obligations. See Note 9, Debt to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for refinancing of our debt agreement.

Critical Accounting Policies and Estimates

~~For a complete description~~The discussion and analysis of ~~what~~our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe ~~to be~~are reasonable under the ~~critical~~circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies ~~and estimates used~~are described in Note 2, Significant Accounting Policies, to the ~~preparation of our Unaudited Condensed Consolidated Financial Statements, refer to~~consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021 (“Annual Report”). Refer~~2022. The critical accounting estimates that are most critical to ~~Note 2.~~ ~~Summary~~a full understanding and evaluation of ~~Significant Accounting Policies~~,our reported financial results are described in ~~the Notes to Unaudited Condensed Consolidated~~Management’s Discussion and Analysis of Financial ~~Statements~~Condition and Results of Operations in Item 17 of ~~Part I of this Quarterly~~our Annual Report on Form ~~10-Q,~~10-K for ~~all significant accounting policies.~~the fiscal year ended December 31, 2022. There ~~have been~~were no ~~significant~~material changes to our critical accounting ~~policies as described in our Annual Report.~~estimates during the three months ended March 31, 2023.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks in the ordinary course of our business. These risks primarily include risk related to interest rate sensitivities and foreign currency exchange rate sensitivity.

Interest Rate Sensitivity

We had cash, cash equivalents and short-term investments of ~~$208.8~~ $176.3 million and $213.1 million as of March 31, 2023, and December 31, 2022, respectively; which consisted of bank deposits, money market funds and U.S. government ~~securities, corporate notes, and commercial paper.~~securities. Such interest-earning instruments carry a degree of interest rate ~~risk; however, historical fluctuations in interest income have not been significant.~~risk.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. A hypothetical 10% change in interest rates ~~during any of the periods presented~~ would ~~not~~ have had a ~~material~~$0.4 million impact ~~on our condensed consolidated financial statements.~~to interest income for the three months ended March 31, 2023 and an immaterial impact to interest income for the three months ended March 31, 2022.

As of March 31, 2023 and December 31, 2022, we had total outstanding debt of $34.9 million ~~which is~~and $34.9 million, respectively, net of debt ~~discount and debt~~ issuance ~~costs, as of March 31, 2022.~~costs. The ~~Third Amended and Restated~~ SVB Loan Agreement Note carries a variable interest rate based on the “Prime Rate” published by The Wall Street Journal. A hypothetical 10% change in interest rates during ~~any~~each of the ~~periods presented~~three months ended March 31, 2023 and 2022 would ~~not~~ have ~~had a material~~resulted in an immaterial impact on our unaudited condensed consolidated financial statements.

Foreign Currency Exchange Rate Sensitivity

We face foreign exchange risk as a result of entering into transactions denominated in currencies other than U.S. dollars, particularly in British Pound Sterling. As of March 31, 2023, and December 31, 2022, we do not consider this risk to be material. We do not utilize any forward foreign exchange ~~contracts.~~contracts, although we may choose to do so in the future. All foreign transactions settle on the applicable spot exchange basis at the time such payments are made.

The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. In the event our foreign currency denominated assets, liabilities, sales, or expenses increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) (principal executive officer) and Chief Financial Officer (“CFO”) (principal financial officer), as appropriate to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule ~~13a-15(b)~~13a under the Exchange Act, our management, including our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this ~~report.~~Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and our CFO have concluded that ~~as of the end of the period covered by this quarterly report,~~ our disclosure controls and procedures ~~were not~~are effective ~~as of March 31, 2022,~~ at the reasonable assurance level ~~because of the material weakness in internal controls which was disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and continues to exist~~ as of March 31, 2022. Notwithstanding the material weakness, our management, including our CEO and CFO, has concluded that our consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2021, and in the Form 10-Q for the three months ending March 31, 2022, fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

~~Material Weakness Related to the Control Environment~~

We did not design or maintain an effective control environment commensurate with our financial reporting requirements. Given the rapid growth in the size and complexity of the business, we failed to maintain a sufficient number of professionals with an appropriate level of accounting and internal control knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. This material weakness contributed to the misstatement of our revenues, revenue reserves, bad debt expense, property and equipment, research and development expense and related financial disclosures, and in the revision of the Company’s consolidated financial statements for the years ended December 31, 2017, December 31, 2018, and each interim period therein as well as the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019. Additionally, this material weakness could result in a misstatement of account balances or disclosures that

would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Based on this assessment and because of this material weakness, we concluded that the Company's internal control over financial reporting was not effective as of March 31, 2022.

~~Remediation Plan Activities~~

As previously disclosed in Part II, Item 9A of the Company’s Annual Report on Form 10-K for the years ended December 31, 2018, December 31, 2019, December 31, 2020, and December 31, 2021 we commenced a remediation plan with the goal of remediating the material weakness as of December 31, 2022. In executing our remediation plan, management performed the following actions related to the material weakness noted above:

•Increased the depth and experience of our Finance organization by increasing the number of management and staff members, expanding our technical experience in accounting, auditing and reporting matters, and performing internal controls training for management and staff members.

•Hired two Internal Audit Directors (one with broad finance experience and one with relevant control experience over information technology environments). These individuals are focused on the development, maintenance and monitoring of our overall control environment and system of key internal controls over financial reporting.

•~~Hired a Chief Risk Officer to lead our ongoing healthcare compliance, internal audit and enterprise risk management efforts.~~

We remain committed to the continued hiring and on-boarding of additional members of the organization supporting the internal control over financial reporting. As of March 31, 2022, we have filled key positions within the Finance organization and will continue to add skilled talent as complexities grow and needs arise.

These investments in resources have significantly improved the stability of our accounting organization. While significant progress has been made in response to the material weakness in the control environment, key remediation plan activities include additional training programs and hiring of additional resources in support of certain control activities. Additionally, time is needed to demonstrate sustainability as it relates to our internal control over financial reporting and improvements made to our complement of resources, including demonstrating sustained operating effectiveness of our internal controls.2023.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting during the quarter ended March 31, ~~2022~~2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override of the controls. Projections of any evaluation of controls effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with policies or procedures.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~Legal Proceedings~~

From time to time, we are involved in claims and legal proceedings or investigations, that arise in the ordinary course of business. Such matters could have an adverse impact on our reputation, business, and financial condition and divert the attention of our management from the operation of our business. These matters are subject to many uncertainties and outcomes that are not predictable.

On February 1, 2021, a putative class action lawsuit was filed in the United States District Court for the Northern District of California (the “Court”) alleging that we and our former Chief Executive Officer, Kevin M. King, violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder (“Securities Class Action Lawsuit”). On August 2, 2021, the lead plaintiff filed an amended complaint, and filed a further amended complaint on September 24, 2021. The amended complaint names as defendants, in addition to us and Mr. King, our former Chief Executive Officer, Michael J. Coyle, and ~~current~~former Chief Financial Officer and former Chief Operating Officer, Douglas J. Devine. The purported class in the amended complaint includes all persons who purchased or acquired our common stock between August 4, 2020 and July 13, 2021, and seeks unspecified damages purportedly sustained by the class. On October 27, 2021, we filed a motion to dismiss the amended complaint. The motion to dismiss was fully briefed and the Court held a hearing on the motion on February 4, 2022, after which the Court took the matter under submission. On March 31, 2022, the Court issued an order granting ~~the Company’s~~our motion to dismiss the Securities Class Action Lawsuit, without allowing plaintiff further leave to amend, and entered judgment in favor of ~~the Company~~us and the other defendants. ~~Plaintiff has~~On April 29, 2022, the plaintiff that filed the initial complaint in the action filed a notice of appeal. On September 7, 2022, the plaintiff-appellant filed its opening brief, and we filed a motion to dismiss for lack of standing to appeal and Article III standing on September 27, 2022. On October 17, 2022, the plaintiff filed its response to our motion to dismiss, and we filed our reply in support of the motion to dismiss on November 3, 2022. Our motion to dismiss the appeal was denied without prejudice on December 8, 2022. We filed our responding brief on the appeal on February 16, 2023. We believe the ~~class action~~Securities Class Action Lawsuit to be without merit and plan to ~~vigorously~~ defend ~~ourselves.~~ourselves vigorously.

On March 26, 2021, we received a grand jury subpoena from the U.S. Attorney’s Office for the Northern District of California requesting information related to communications with the Food and Drug Administration and our ~~products.~~products and services. On September 14, 2021, we received a second subpoena requesting additional information. On April 4, 2023, we received a Subpoena Duces Tecum from the Consumer Protection Branch, Civil Division of the U.S. Department of Justice, requesting production of various documentsregarding our products and services. We are cooperating fully ~~and are providing the requested information.~~

on these matters.

At this time, we are unable to predict the eventual scope, duration or outcome of the aforementioned proceedings. See also Part II, Item 1A “Risk Factors — Risks Related to Other Legal and Regulatory Matters” for more information on these matters.

ITEM 1A.RISK FACTORS

~~Investing~~Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. Before making a decision to invest in, hold or sell our common stock, ~~involves a high degree of risk. You~~stockholders and potential stockholders should carefully consider the risks and uncertainties described below, ~~together with all of~~in addition to the other information contained in or incorporated by reference into this Quarterly Report on Form 10-Q, ~~including our financial statements and~~as well as the ~~related notes thereto, before making a decision to invest in our common stock. The realization of~~other information we file with the SEC. If any of the following risks ~~could materially and adversely affect~~are realized, our business, financial condition, ~~operating~~ results of operations and ~~prospects.~~prospects could be materially and adversely affected. In that ~~event,~~case, the ~~price~~value of our common stock could decline and ~~you~~stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could ~~lose part or all~~have a material adverse effect on our business, financial condition and results of ~~your investment~~operations. Refer to our disclaimer regarding forward-looking statements at the beginning of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this Quarterly Report.

Summary of Risk Factors

Our business is subject to numerous risks and uncertainties, ~~that you should consider before investing in our company, as~~including those risks more fully described below. ~~The principal factors and uncertainties that make investing in our company risky~~These risks include, among ~~others:~~others, the following, which we consider our most material risks:

•Reimbursement by Medicare is highly regulated and subject to change, and our failure to comply with applicable regulations, including regulations not designed for diagnostic tests like our Zio Services, could prevent us from receiving reimbursement under the Medicare program and some commercial payors, subject us to penalties, and adversely affect our reputation, business and results of operations.

•~~changes in public health insurance coverage and CMS~~If reimbursement ~~rates~~or other payment for ~~the Zio service could affect the adoption and profitability of~~ our Zio ~~service;~~

Services is reduced or modified in the United States, including through cost containment measures or changes to policies with respect to pricing, our business could suffer.

•if third-party commercial payors do not provide any or adequate reimbursement, rescind or modify their reimbursement policies or delay payments for our products, including as a result of the CMS and Medicare Administrative Contractor (“MAC”) reimbursement rates, including Novitas Solutions reimbursement rates for our Zio XT service, or ifIf we are unable to ~~successfully negotiate reimbursement contracts,~~expand the number of third-party commercial payors with which we contract or expand coverage for existing third-party commercial payors, our commercial success could be ~~compromised;~~

impacted.

•~~the COVID-19 pandemic and efforts~~Our revenue relies on our Zio Services, which are currently our only offerings. If our Zio Services or future service offerings fail to ~~reduce its spread have adversely impacted, and is expected to continue to materially and adversely impact,~~gain, or lose, market acceptance, our business ~~and operations;~~

will suffer.

•~~we have a history of net losses, which we expect to continue, and we may not be able to achieve or sustain profitability in the future;~~

•~~our business is dependent upon physicians adopting our Zio service and if we fail to obtain broad adoption, our business would be adversely affected;~~

•~~we plan to introduce new products and services and our business will be harmed if we are not successful in selling these new products and services to our existing customers and new customers;~~

•~~the~~The market for ambulatory cardiac monitoring solutions is highly competitive. If our competitors are able to develop or market monitoring ~~products~~devices and services that are more effective, or gain greater acceptance in the marketplace, than any ~~products~~services and ~~services~~related devices we develop, our commercial opportunities will be reduced or ~~eliminated;~~

eliminated.

•Billing for our Zio Services is complex, and we ~~have recently experienced management turnover, which creates uncertainties~~must dedicate substantial time and ~~could harm our business;~~

resources to the billing process.

•Audits or denials of our claims by government agencies or payors could expose us to recoupment, regulatory scrutiny, and penalties.

•We are currently undertaking a transformation of our revenue cycle management function and we may ~~become~~fail to realize the anticipated benefits of these efforts.

•Although our current Zio Systems are comprised of medical devices that have received FDA marketing authorization (510(k) clearance), we may regularly engage in product enhancements and in iterative changes to existing products, as well as seeking to develop new technology or use of technology for new indications for use. These medical device developments may trigger further regulatory reviews and the results of those reviews are unpredictable.

•We are subject to extensive compliance requirements for the quality of the medical device we manufacture for use in our Zio Services, and for vigilance on complaint-handling, escalation, assessment, and reporting of adverse events and malfunctions. A wide range of quality, regulatory, or safety matters could trigger the need for a ~~party~~recall or correction to ~~intellectual property litigation~~marketed products.

•Because of the patient populations for which our services are provided and the complexity of the healthcare environment in which we operate, a high degree of medical and clinical input may be necessary to evaluate complaints and adverse events, and in some cases, there may be disagreement over whether our services or ~~administrative proceedings that~~the medical devices used in our service may have caused or contributed to an event.

•If we are unable to keep up with demand for our Zio Services, our revenue could be ~~costly~~impaired, market acceptance for our Zio Services could be harmed, and ~~could interfere with~~physicians may instead order our competitors’ services.

•We depend on third-party vendors for the supply and manufacture of certain components of our Zio Systems, as well as for other aspects of our operations.

•Our ability to compete depends on our ability to ~~provide the Zio service; and~~

innovate successfully.

•~~changes~~We have entered into a development agreement with a third-party that may not result in the development of commercially viable devices or the generation of significant future revenues.

•International expansion of our business exposes us to market, regulatory, ~~environment~~political, operational, financial and economic risks associated with doing business outside of the United States.

•Our success depends on our ability to attract and retain senior management and key personnel.

•Failure to receive the Zio System patches used for the provision of the Zio Services we provide may result in a loss of capital as well as revenue where the receipt of returned devices and processing of data retrieved from returned devices is required to provide our Zio Services.

•Our plans include a high degree of focus on the mSToPs criteria for Afib screening. There are risks that the clinical or payor community will not fully accept these criteria as a basis for selection of patients suitable for screening.

•We may face risks associated with acquisitions of companies, products, and technologies and our business could be harmed if we are unable to address these risks.

•Our use of third-party service providers or iRhythm company resources located outside the United States to support certain customer care, clinical and other operations of our independent diagnostic testing facilities ("IDTFs") may present challenges, and if we are ineffective in limiting work performed by these service providers or iRhythm consistent with applicable regulations or our contractual agreements with commercial payors, we may be subject to penalties or experience loss of revenue.

•If we fail to comply with medical device, healthcare and other governmental regulations, we could face substantial penalties and our business, results of operations, and financial condition could be adversely affected.

•Changes in applicable laws or regulations or the interpretation or enforcement policies of regulators governing our IDTFs and Zio Services may constrain or require us to restructure our operations or adapt certain business strategies, which may harm our revenue and operating results.

~~Risks Related to~~ •Our ~~Business~~

~~The COVID-19 pandemic~~business relies on orders from licensed healthcare providers, and ~~efforts to reduce its spread have adversely impacted,~~the continuing clinical acceptance and ~~is expected to continue to materially and adversely impact, our business and operations.~~

The COVID-19 pandemic has had, and is expected to continue to have, an adverse impact on our operations, particularly as a result of preventive and precautionary measures that we, other businesses, and governments are taking. The spread of COVID-19 in the United States has resulted in travel restrictions impacting all areasadoption of our ~~business, most notably our sales representatives. Many hospitals also have limited access for non-patients,~~Zio Services depends upon strong working relationships with healthcare providers, including ~~our sales professionals, which has negatively impacted our access~~physicians. These relationships, interactions, and arrangements are subject to a high degree of scrutiny by government regulators and enforcement bodies.

•Our communications with healthcare stakeholders – physicians and ~~their patients. New hospital sanitization~~other healthcare professionals, payors and ~~social distancing protocols,~~similar entities, as well as ~~increased competition~~patients and lay caregivers – are subject to a high degree of scrutiny for ~~resources within hospitals that have dedicated certain resources~~compliance with a wide range of laws and regulations. Continuing or increasing our sales and marketing and other external communication efforts may expose us to ~~COVID patients, have impacted~~additional risk of being alleged or deemed to be non-compliant by regulatory, enforcement authorities, or competitors.

•While most of our revenue results from claims submitted to payors for diagnostic medical procedures, we offer, and ~~may continue~~are looking to ~~impact~~expand, alternative payment and service delivery models. Piloting, evaluating, and implementing these alternative payment and service delivery models requires interactions with commercial payors, physicians, and patients; these interactions are subject to laws and regulations aimed at preventing healthcare fraud and abuse. If these models are unsuccessful, or if we are unable to fully comply with such laws as we pursue these strategies, our ~~business and operations. We have also noted staffing shortage at providers in certain regions in the United States~~commercial success could be compromised and we ~~believe that~~could face substantial penalties.

•In the ~~status~~future we may identify additional material weaknesses or otherwise fail to maintain an effective system of ~~provider capacity and resource prioritization, vaccination levels and other pandemic-related effects could materially impact our revenue in future periods.~~

~~Additionally, an increase in the unemployment rate due to the impact of COVID-19 would decrease the number of potential patients with access to health insurance,~~internal controls, which may result in ~~fewer diagnostic procedures. As hospitals cancel~~material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.

•Our financial results may fluctuate significantly from quarter-to-quarter and ~~defer diagnostic~~may not fully reflect the underlying performance of our business.

•We are subject to legal proceedings and ~~elective procedures, it reduces their revenue~~government investigations that could adversely affect our business, financial condition, and ~~impacts their financial~~ results of operations.

•We are subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from shipping affected devices, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief.

•We are subject to complex and evolving U.S. and foreign laws and regulations and other requirements regarding privacy, data protection, security, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.

•If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

•Our stock price is highly volatile and investing in our stock involves a high degree of risk, which could result in ~~pricing pressure on~~substantial losses for investors.

•Increasing our ~~services as they seek cost savings. Prolonged restrictions relating to COVID-19~~financial leverage could ~~adversely~~ affect our ~~revenue, results of~~ operations ~~cash flows,~~ and ~~financial position.~~profitability.

•

Although we saw recovery of patient registrations for the Zio service in 2021, we expect these challenges of the COVID-19 pandemic to continue to impact the volume of Zio services provided for the duration of the pandemic, but its extent cannot be quantified at this time. Our customers’ patients are also experiencing the economic impact of the current pandemic. Even an important diagnostic procedure like the Zio service may be less of a priority than other items for those patients who have lost their jobs, are furloughed, have reduced work hours or are worried about the continuation of their medical insurance. Such economic effects on patients may delay or disrupt our ability to both provision our service and collect co-payments or out-of-pocket costs, which would have an adverse effect on our revenue and cash flow. Patients may also be reluctant to visit their physicians or hospitals due to fear of contracting COVID-19. Physicians are not performing as many diagnostic tests for their patients and the facilities where these tests are performed may not be open, adequately staffed or open the entire day. Even where physicians continue to treat symptomatic patients, treatment of asymptomatic patients is being deferred in many cases. The reduction in diagnostic testing and physician visits, the increase in deferred treatment, and changes in patient behaviors are translating into fewer Zio services being prescribed.

Government mandates related to the COVID-19 pandemic have impacted, and are expected to continue to impact, our personnel and personnel at third-party manufacturing facilities in the United States and other countries, and the availability or cost of materials, which could disrupt our supply chain and reduce margins. For instance, on or about March 16, 2020, the Health Officers for the counties of San Francisco (where the Company's headquarters is located), Santa Clara, San Mateo, Marin, Contra Costa and Alameda, where many employees are located, issued mandatory shelter-in-place orders and all employees transitioned to a remote work environment. We are also subject to orders in Southern California that temporarily shut down our manufacturing and distribution facilities in Cypress, California. While we have continued to deliver the Zio service by operating with remote employees and essential employees on site, an extended implementation of these government mandates could

further impact our ability to effectively provide the Zio service, and could impede progress of all ongoing initiatives. Appropriate social distancing techniques and other measures at our facilities have been implemented for employees who are required by job scope or who have chosen to return to our facilities.

~~Our ongoing operations~~ may be impacted ~~as a result of employees assuming additional roles~~by domestic and responsibilities within our organization and we would have fewer resources available to run our operations, which could negatively impact our business operations and revenue as a result. We may also encounter voluntary departures of key employees due to any of the foregoing actions that we undertake. If key personnel or large groups of our employees contract the virus, that may also impact our business and operations. For example, an outbreak in our manufacturing facility could cause us to have to shut down our manufacturing operations, which would in turn present risk to the ongoing supply of devices required to continue our business operations. In the meantime, we have taken steps to support our employees, including providing the ability for the majority of employees to work remotely and implementing policies to enhance employee safety, including appropriate social distancing techniques, for those employees required or choosing to work in our facilities. We are also assessing our business continuity plans in the context of this pandemic.

Additionally, due to COVID-19, we have experienced delays in receiving Zio XT monitors back from patients, with some patients not returning the device at all. As a result, the increased prevalence of COVID-19 could result in negative changes to historical expectations around device return timelines and loss rates, both of which would negatively impact our finances. Finally, we anticipate that the COVID-19 pandemic may impact clinical and regulatory matters. COVID-19 is delaying enrollment in new clinical trials across the medical device industry and may affect any new trials we decide to pursue. Regulatory clearances may take extended duration of time as agencies focus on COVID-related priorities which, in turn, would delay our introduction of new products and services.

The COVID-19 pandemic has also created global supply chain shortages and delays, particularly for some electronic components, such as those contained in our PCBAs. We have experienced longer lead times, sometimes in excess of 52 weeks, and increased broker fees during the COVID-19 pandemic, which has increased our cost of revenue. We have also had to increase our inventory levels as a result of these potential shortages. If we are unable to secure our typical supply of components on a timely basis, it may affect our ability to provide the Zio service on a timely basis, which would affect our cash flows and ability to operate on a timely basis.

Any of these occurrences may significantly harm our business, financial condition, cash flows and prospects. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. This impact is having a material, adverse impact on our liquidity, capital resources, operations and business and those of the third parties on which we rely, and could worsen over time. The extent to which the COVID-19 pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. We do not yet know the full extent of potential delays or impacts on our business, financial condition, cash flows and results of operations.

~~Unfavorable~~ global economic and political conditions, as well as natural disasters, pandemics, and other catastrophic events, which could adversely affect our business, financial condition or results of operations.

Risks Related to Our Industry, Business and Operations

~~Our~~Reimbursement by Medicare is highly regulated and subject to change, and our failure to comply with applicable regulations, including regulations not designed for diagnostic tests like our Zio Services, could prevent us from receiving reimbursement under the Medicare program and some commercial payors, subject us to penalties, and adversely affect our reputation, business and results of ~~operations could be adversely affected~~operations.

During the three months ended March 31, 2023, we received approximately 24% of our total revenue from the Medicare program (inclusive of Medicare Advantage). The Medicare program is administered by ~~general conditions in~~CMS, which imposes extensive and detailed requirements on diagnostic services providers, including IDTFs. These requirements include, but are not limited to, rules that govern how we structure our relationships with physicians, how we operate our IDTFs and market our Zio Services, when we may perform diagnostic tests, and how and when we submit reimbursement claims. Our failure to comply with the ~~global economy~~applicable Medicare rules and ~~in the global financial markets. The COVID-19 pandemic has caused extreme volatility and disruptions in the global capital and credit markets. A severe or prolonged economic downturn,~~requirements could result in discontinuation of our reimbursement under the Medicare payment program, a ~~variety of risks~~requirement to ~~our business, including driving hospitals~~return funds already paid to ~~tighten budgets and curtail spending,~~us, civil monetary penalties, criminal penalties, and/or exclusion from the Medicare program, which would ~~negatively~~have a material adverse impact on our ~~sales~~reputation, business and ~~business. In addition, higher unemployment~~results of operations.

Notably, CMS has acknowledged that the IDTF regulations were designed for “traditional” IDTFs that administer tests to patients in-person, at a single point in time, and from a single location, and only recently has CMS initiated changes to the regulations to address IDTFs like iRhythm that furnish “indirect tests” that do not require in-person interaction and involve technicians performing computer analyses offsite or ~~reductions in employer-provided benefits plans~~at another location. The changes, however, do not address all gaps identified by CMS relating to IDTF operations and the Medicare billing requirements. Our failure to comply with the applicable Medicare regulations, or regulators’ disagreement with our interpretation of the regulations as applied to indirect tests, such as the Zio Services, could result in ~~fewer commercially insured patients,~~the discontinuation of our reimbursement under the Medicare program, a requirement to return funds already paid to us, civil monetary penalties, criminal penalties, and/or exclusion from the Medicare program.

In addition, many commercial payors require our IDTFs to maintain enrollment with the Medicare program as well as accreditation and certification with the Joint Commission. If we fail to obtain and maintain IDTF enrollment or accreditation and certification, our Zio Services may no longer be reimbursed by those commercial payors, which could ~~negatively~~have a material adverse impact on our ~~revenue~~reputation, business and ~~business as a result. A weak~~results of operations.

If reimbursement or ~~declining economy could also strain our third party manufacturers or suppliers, possibly resulting in supply disruptions, or cause our customers to delay making payments~~other payment for our Zio ~~service. Any~~Services is reduced or modified in the United States, including through cost containment measures or changes to policies with respect to pricing, our business could suffer.

We receive a substantial portion of ~~the foregoing could harm~~ our ~~business~~revenue from Medicare and third-party commercial payors with which we contract, and we cannot ~~anticipate all~~predict whether and to what extent existing reimbursement rates will continue to be available. If CMS or any of our key commercial payors reduce reimbursement rates for our Zio Services, our business, operating results, and prospects would be adversely affected.

CMS updates the ~~ways~~reimbursement rates for diagnostic tests performed by IDTFs annually via the Medicare Physician Fee Schedule. Effective January 1, 2023, CMS established national payment rates for the CPT codes we use to report the long-term continuous monitoring services we perform with our Zio XT System and our Zio Monitor System: CPT codes 93247 (for wear-time of greater than 7 days and up to 15 days) and 93243 (for wear-time of greater than 48 hours and up to 7 days). Based on the relative value units CMS assigned to CPT codes 93247 and 93243, the national reimbursement rates for these services in 2023 are $243.65 and $231.79, respectively, and range from $247.59 to $334.46 and $235.54 to $318.17 for our Medicare-enrolled IDTF locations in Deerfield, Illinois, Houston, Texas, and San Francisco, California, when considering the geographic practice cost index for these locations. Because remote cardiac monitoring technology, including the Zio System, are rapidly evolving, there is a continuing risk that relative value units assigned, and reimbursement rates set, by CMS may not adequately reflect the value and expense of this technology and associated monitoring services, and CMS may reduce these rates in the future, which ~~the economic climate and financial market conditions could~~would adversely affect our ~~business~~financial results.

Additionally, commercial payors with which we contract may seek to reduce our reimbursement rate through further contract negotiations. For example, the recent actions taken by CMS to finalize national reimbursement rates for CPT Codes 93247 and 93243 reduced the Medicare reimbursement rates for these services performed at our Deerfield, Illinois location. Accordingly, we may observe certain commercial payors in this region seeking to adjust their reimbursement rates for these services as well.

In addition, our agreements with commercial payors typically allow either party to terminate the contract at any time by providing prior written notice, in accordance with the agreement, to the other party, which means our commercial payors may elect to terminate their contracts with us for any reason. A commercial payor who terminates or does not renew their contract with us may, or may not, alter their coverage for the type of services we provide. In the event any of our key commercial payors terminate their agreements with us, elect not to renew or enter into new agreements with us upon expiration of their current agreements, or do not renew or establish new agreements on terms as favorable as are currently contracted, our business, operating results, and prospects would be adversely affected.

If we are unable to expand the number of third-party commercial payors with which we contract or expand coverage for existing third-party commercial payors, our commercial success could be impacted.

There is significant uncertainty concerning third-party reimbursement of any new service until a contracted rate is established for that service with the commercial payor. Reimbursement by a commercial payor may depend on several factors, including, but not limited to, a payor’s determination that the ordered service is not experimental or investigational, medically necessary and appropriate for the specific patient, cost effective, supported by peer-reviewed publications, and accepted and used by physicians and other clinicians within their provider network.

Since each payor decides whether to establish a policy concerning reimbursement or to contract with us to set the price of reimbursement, seeking reimbursement on a payor-by-payor basis is a time-consuming and costly process to which we dedicate substantial resources. If we do not dedicate sufficient resources to establishing contracts with commercial payors and supporting payors’ reimbursement determinations by demonstrating the clinical value of our Zio Services through studies and physician adoption, we may encounter several adverse consequences that could compromise the commercial success of our business. Such adverse consequences may include an inability to secure additional contracts with commercial payors, reluctance by physicians to order our Zio Services due to concerns that patients may face significant out-of-pocket expenses associated with an out-of-network IDTF, a decline in the amount that we are reimbursed for our services, less predictable revenue, and an increase in the efforts and resources necessary to obtain reimbursement for our services on a claim-by-claim basis.

Additionally, for our out-of-network or cash pay patients, we may be subject to state and federal surprise billing laws that impose limits on amounts that can be charged to such patients and/or the amount we can receive for out-of-network services from commercial payors. One such law, the federal No Surprises Act, requires covered providers to provide “good faith estimates” to patients and establishes a detailed and potentially costly independent dispute resolution process governing fee disputes with those patients. These laws and regulations may change, and additional implementation regulations are expected for the No Surprises Act, and we anticipate these requirements may apply to our business in the future.

Our revenue relies on our Zio Services, which are currently our only offerings. If our Zio Services or future service offerings fail to gain, or lose, market acceptance, our business will suffer.

Our current revenue is dependent on orders for our Zio Services, and we expect that reimbursement for our Zio Services will account for substantially all our revenue for the foreseeable future. We are in various stages of research and development for other diagnostic screening solutions and new indications for our technology and our Zio Services; however, there can be no assurance that we will be able to successfully develop and commercialize any new services and related devices. Any new services may not be accepted by physicians or may merely replace revenue generated by our Zio Services and not generate additional revenue. If we have difficulty launching new services, our reputation may be harmed and our financial results adversely affected. In order to substantially increase our revenue, we will need to target physicians other than cardiologists, such as emergency room doctors, primary care physicians, and other physicians with whom we have had little contact and who may require a different type of marketing effort. If we are unable to increase orders for our Zio Services, expand reimbursement for our Zio Services, or successfully develop and commercialize new services and related devices, our revenue and our ability to achieve and sustain profitability would be impaired.

The market for ambulatory cardiac monitoring solutions is highly competitive. If our competitors are able to develop or market monitoring devices and services that are more effective, or gain greater acceptance in the marketplace, than any services and related devices we develop, our commercial opportunities will be reduced or eliminated.

The market for remote cardiac monitoring products and services is competitive, characterized by rapid change resulting from technological advances, scientific discoveries, and other market activities of industry participants. Our Zio Services compete with a variety of products and services that provide alternatives for remote cardiac monitoring, including traditional, short-term Holter monitors and event monitors. Our industry is highly fragmented and characterized by a small number of large manufacturers and a large number of smaller regional service providers. These third parties compete with us in marketing to payors and ordering physicians, recruiting and retaining qualified personnel, acquiring technology, and developing products and services that compete with our Zio Services and related devices. Our ability to compete effectively depends on our ability to distinguish our company and our Zio Services from our competitors and their products, and includes such factors as safety and effectiveness; acute and long-term outcomes; ease of use; price; physician, hospital, and clinic acceptance; and third-party reimbursement.

Our industry is subject to rapid change and is significantly affected by new product introductions, results of clinical research, corporate combinations, and other factors. Large competitors in the remote cardiac market include companies that sell standard Holter monitors including GE Healthcare, Philips Healthcare, Mortara Instrument, Inc., Spacelabs Healthcare Inc. and Welch Allyn Holdings, Inc. (acquired by Hill-Rom Holdings, Inc.). Additional competitors, such as BioTelemetry, Inc. (acquired by Royal Philips), Preventice Solutions, Inc. (acquired by Boston Scientific, Inc.), and Bardy Diagnostics, Inc. (acquired by Hill-Rom Holdings, Inc. which was acquired by Baxter International, Inc.) manufacture remote cardiac monitoring devices and also offer monitoring services. These companies have also developed other patch-based cardiac monitors that have received FDA and foreign regulatory clearances. There are also several small start-up companies trying to compete in the patch-based cardiac monitoring space, as well as several entering the patch-based cardiac monitoring market.

We have also seen a trend in the market for large medical device companies to acquire, invest in, or form alliances with these smaller companies in order to diversify their product offerings and participate in the digital health space. Future competition could come from makers of wearable fitness products or large information technology companies focused on improving healthcare. For example, Apple Inc. and Fitbit have added capabilities on their platforms to measure non-continuous ECG and to alert users to the potential presence of irregular heartbeats suggestive of asymptomatic Afib. These competitors and potential competitors may introduce new products and services that more directly compete with our Zio Services and related devices.

Billing for our Zio Services is complex, and we must dedicate substantial time and resources to the billing process.

Billing for diagnostic services is complex, time-consuming, and expensive. Depending on the billing arrangement and applicable law, we bill several types of entities and payors, including federal healthcare programs, third-party commercial payors, healthcare providers, and healthcare institutions, which may have different billing requirements, coverage criteria, procedures, or expectations. We also bill insured patients for co-payments, co-insurance, and deductible amounts, as well as bill self-pay patients directly.

We also face risk in our collection efforts, including potential write-offs of doubtful accounts and long collection cycles, which could adversely affect our business, financial condition, and results of operations.

Several factors make the billing and collection process uncertain, including differences between the submitted claim price for our Zio Services and the reimbursement rates of payors; compliance with complex federal and state regulations related to billing the Medicare and Medicaid programs; the effect of patient co-payments, co-insurance, and deductible amounts, which may vary depending on the timing of the claim relative to the insured’s annual policy year; differences in coverage policies, criteria, and billing requirements among payors; and incorrect or missing patient history, indications, or billing information and delays in verifying and resolving the same.

Additionally, our billing activities require us to implement compliance procedures and oversight, train and monitor our employees, subcontractors, and agents, and undertake internal review procedures to evaluate compliance with applicable laws, regulations, and internal policies. These activities require a tremendous dedication of ~~net losses, which~~resources and, as a result, we have engaged third-party vendors, such as XIFIN, Inc. (“XIFIN”), to undertake certain components of our billing and collections operations. The complexities we face related to billing for our Zio Services, and the related uncertainty in obtaining payment for our Zio Services, could negatively affect our revenue and cash flow, our ability to achieve profitability, and the consistency and comparability of our results of operations.

Audits or denials of our claims by government agencies or payors could expose us to recoupment, regulatory scrutiny, and penalties.

As an IDTF, we submit claims directly to, and receive reimbursement from, federal healthcare programs, including Medicare, as well as other third-party commercial payors. These programs and payors, including contractors on their behalf, may conduct pre- and post-payment audits and reviews of claims submitted for reimbursement. Further, the federal healthcare programs may impose suspensions on both payment and participation in response to allegations of fraud or other noncompliance.

Other controls imposed by CMS and commercial payors designed to reduce costs, commonly referred to as “utilization review,” may also affect our operations. Federal law contains numerous provisions designed to ensure that services rendered to CMS patients meet professionally recognized standards and are medically necessary, appropriate for the specific patient, and cost-effective. These provisions include a requirement that a quality improvement organization review a sampling of claims for Medicare beneficiaries to assess the quality of care and appropriateness of the services provided. These quality improvement organizations may deny payment for services or assess fines and have the authority to recommend to CMS that a provider in substantial noncompliance applicable Medicare requirements and quality standards be excluded from participation in the Medicare program. The Affordable Care Act also expands the use of prepayment review by Medicare Administrative Contractors by eliminating statutory restrictions on their use and, as a result, we except efforts to impose more stringent cost controls to continue. As a provider enrolled in federal healthcare programs, we expect to ~~continue,~~be subject to such audits and claims reviews in the future, which may result in suspensions or other restrictions on our ability to submit claims for our services, payment delays, overpayment recoupments, and claims denials, which would negatively impact our business, financial condition, and results of operations, and may jeopardize our participation in these federal healthcare programs.

We are currently undertaking a transformation of our revenue cycle management function and we may fail to realize the anticipated benefits of these efforts. These activities involve significant time and resources, and our failure to execute these activities efficiently and effectively may cause our revenue and accounts receivable to be delayed or reduced and could have an adverse effect on our business and cause reputational harm.

We are undertaking a transformation of our revenue cycle management function, which plan contemplates the engagement of service providers to support certain activities. The success of this plan depends on our ability to integrate these service providers in a timely manner to scale our operations to facilitates growth opportunities, without adversely affecting current revenues and accounts receivable. If we are not able to successfully achieve these objectives, the anticipated benefits of this transformation may not be realized fully or at all or may take longer to realize than expected. In addition, there is a significant degree of difficulty and management distraction inherent in the process of integrating with service providers. These difficulties include challenges supporting certain operations and activities with more than one service providers, integrating technologies (including IT systems and processes, procedures, policies and operations, and retaining key personnel). These activities may be complex and time consuming and involve delays or additional and unforeseen expenses. The process of transitioning to these service providers, the integration process and other disruptions may also disrupt our ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that could adversely affect our relationships with payors, patients, employees and others. Any failure to execute these activities effectively and efficiently may cause our revenue and account receivable to be delayed or reduced and could have an adverse effect on our business and cause reputational harm.

Although our current Zio Systems are comprised of medical devices that have received FDA marketing authorization (510(k) clearance), we may regularly engage in product enhancements and in iterative changes to existing products, as well as seeking to develop new technology or use of technology for new indications for use. These medical device developments may trigger further regulatory reviews and the results of those reviews are unpredictable.

Before a new medical device or a new intended use for a medical device can be marketed in the United States, a company must first submit an application and receive either 510(k) clearance, De Novo marketing rights or premarket approval from the FDA, unless an exemption applies. All of these processes can be expensive, lengthy and unpredictable. We may not be able to ~~achieve~~obtain the clearances or ~~sustain profitability~~approvals we seek or may be unduly delayed in doing so, which could harm our business. Even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the product, which may limit the market for the product. Although we have obtained 510(k) clearances to market our Zio System, our clearances can be revoked if safety, efficacy, or significant regulatory compliance problems develop. Even planned changes and improvements to devices and their uses can trigger the need for a new 510(k). FDA requirements dictate that we must evaluate potential changes and document our decision-making regarding the need for additional submissions and clearances.

Significant changes or modifications in design, components, method of manufacture or the intended use or technological characteristics of our Zio System may require new FDA marketing authorization or CE Mark certification (European Union) or UKCA Mark certification (United Kingdom). Unless effectively planned for in advance of our desired marketing timeline, in some circumstances we may be required to cease marketing certain products until clearances or approvals are obtained, for example, if a change was made to reduce risk to health or remedy an FDA violation. FDA requires device manufacturers to internally analyze and document a decision that a new clearance or approval is viewed as unnecessary. We have made modifications to our Zio System in the ~~future.~~

~~We have incurred net losses since our inception in September 2006. The losses and accumulated deficit were primarily due to the substantial investments~~past that we made to develop and improve our technology and products and improve our business and the Zio service through research and development efforts and infrastructure improvements. Over the next several years, we expect to continue to devote substantially all of our resources to increase the adoption of and reimbursement for our Zio service, which includes Zio XT and Zio AT, and to developbelieve do not require additional ~~arrhythmia detection and management products and services. These efforts may prove more expensive than we currently anticipate~~clearances or approvals, and we may make additional modifications in the future. If the FDA or an EU/UK Notified/Approved Body disagrees and requires new marketing authorization for any of these modifications, we may be required to recall and to stop selling the impacted Zio System, which could harm our operating results and require us to redesign our products or services. In these circumstances, we may be subject to significant enforcement actions. We may not ~~succeed~~be able to obtain additional marketing authorizations in ~~increasing our revenue sufficiently to offset these higher expenses~~a timely fashion, or at all. Accordingly, we cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability. Our failure to achieve and sustain profitability in the futureall, which could ~~cause the market price of our common stock to decline.~~

~~Our business is dependent upon physicians adopting our Zio service and if we fail to obtain broad adoption, our business would be adversely affected.~~

~~Our success will depend on~~harm our ability to ~~bring awareness~~introduce new or enhanced products in a timely manner, which in turn could harm our future growth.

We are subject to extensive compliance requirements for the quality of the medical device we manufacture for use in our Zio Services, and for vigilance on complaint-handling, escalation, assessment, and reporting of adverse events and malfunctions. A wide range of quality, regulatory, or safety matters could trigger the need for a recall or correction to marketed products.

Our design and manufacturing facilities and processes and those of certain third-party suppliers are subject to unannounced FDA, state, and Notified/Approved Body regulatory inspections for compliance with various medical device regulations and standards, including the Quality System Regulation (“QSR”), also known as 21 CFR Part 820, European Union Medical Device Directive (“EU MDD”), New European Union Medical Device Regulations (“EU MDR”), and UK Medical Device Regulations (“UK MDR”) requirements. Developing and maintaining a compliant quality system is time consuming and investment intensive. Requirements and standards may change and evolve over time, and we will need to adapt. Failure to maintain compliance with, or not fully complying with the requirements of the FDA and state regulators could result in enforcement actions, which could include the issuance of warning letters, adverse publicity, seizures, prohibitions on product sales, recalls, and civil and criminal penalties, any one of which could significantly impact our manufacturing supply and provision of services and impair our financial results. Failure to maintain full compliance with the requirements of EU MDD, EU MDR, and UK MDR could result in similar disruptions in these markets.

We are required to file various reports with the FDA, and EU or UK regulators, including reports required by each jurisdiction's adverse event and field action reporting regulations. These reports are often required if our Zio System may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. They may also be necessary or prudent for a range of other reasons relating to the importance of gathering information in the post marketing setting and managing risk throughout the product lifecycle. If these reports are not filed in a timely manner, regulators may impose sanctions and we may be subject to product liability or regulatory enforcement actions, all of which could harm our business. These reports are typically publicly available information in most jurisdictions, including the United States. If we initiate a field action (whether a “correction” made relative to a device that remains in the field, which could be through a labeling or software update, or “removal” or “recall” and return of that device to us, or field advisory notices) to reduce a risk to health posed by our Zio System, we would be required to report the Correction or Removal to the FDA and, in many cases, similar reports to other regulatory agencies. If these reports are not filed in a timely manner, regulators may impose sanctions and we may be subject to product liability or regulatory enforcement actions, all of which could harm our business. These reports are typically publicly available information in most jurisdictions, including the United States.

For example, on September 28, 2022, we initiated a Customer Advisory Notice to Zio AT customers regarding a Zio AT labeling correction; the labeling changes involve additions and modifications to the Zio ~~brand~~AT labeling precautions relating to the device’s maximum transmission limits during wear, and ~~educate~~also to the need for healthcare providers to complete registration to initiate monitoring services. We reported this Customer Advisory Notice and related information to the FDA under 21 C.F.R., Part 806 and the FDA classified this field action as a Class II Recall following our initial 806 report. We have completed the distribution of the Advisory Notice to our identified impacted customers; and although the status remains open in the FDA recall database, we requested the closure of this field action on March 31, 2023. This labeling correction followed our assessment of topics raised in the August 2022 FDA inspection focused on Zio AT. We have been in dialogue with the FDA in relation to the inspection process, and in connection with our Customer Advisory Notice and 806 report. Our communications to the FDA are continuing at this time through our monthly updates, following our 483 responses submitted in September of 2022. Although we do not expect this Zio AT labeling correction or the activities associated with the topics raised in the FDA inspection to present a material risk to our business at this time, FDA observation responses, field action or corrections and the 806 process can be unpredictable and can present regulatory and commercial risks and uncertainties relating to matters including product labeling, the scope and approach of the correction, and/or customer and patient perception of our technologies and services.

Depending on the reason for the correction or removal and the potential severity of the impact to patient safety or the effectiveness of the device, the FDA may require differing degrees of communication to alert those who may be in possession of an impacted device. We would generally be subject to similar requirements in jurisdictions outside the United States where the Zio products are used. Furthermore, even if we adhere to regulatory standards and expectations in our corrective actions, the public nature of such actions can result in broader negative publicity and perceptions, which could harm our reputation.

If we assess a potential quality issue or complaint or product enhancement as not requiring either field action or notification, respectively, regulators may review documentation of that decision during a subsequent audit. If regulators disagree with our decision, or take issue with either our investigation process or the resulting documentation or course of action, we may be subject to a range of potential regulatory enforcement actions or required to take corrective actions, which depending on their nature and scope could harm our business.

Because of the patient populations for which our services are provided and the complexity of the healthcare environment in which we operate, a high degree of medical and clinical input may be necessary to evaluate complaints and adverse events, and in some cases, there may be disagreement over whether our services or the medical devices used in our service may have caused or contributed to an event.

Our Zio System and Zio Services are not intended to be prescribed or ordered for use as an emergency system, nor are they intended to be used where inpatient monitoring is needed or life-threatening arrhythmias are suspected. Given the nature of arrhythmias and the patient population for which our Zio Services are ordered by physicians, ~~regarding~~in which there may be several health conditions present, there are instances in which a patient may experience a medical event during the ~~benefits~~wear period of our Zio System, and it may be medically and logistically challenging to obtain information sufficient to definitively determine all contributing factors. In some instances, we may receive initial reports of complaints from our CCTs or through our customer service ~~over existing products~~representatives. The initial reports of these non-physicians are likely to contain information that requires verification and ~~services, such as Holter monitors and event monitors, and~~further investigation. We are subject to ~~persuade them~~FDA requirements to ~~prescribe the~~investigate complaints about our Zio ~~service as the diagnostic product for their patients. We~~System. If we do not ~~know if the Zio service will be successful over the long term~~effectively manage and ~~market acceptance~~monitor our complaint-handling procedures, we may be ~~hindered if physicians are not presented with compelling data demonstrating the efficacy~~subject to regulatory enforcement action, litigation risks, and risk of our service compared to alternative technologies. Any studies we, or third parties which we sponsor, may conduct comparing our Zio service with alternative technologies will be expensive, time consuming and may not yield positive results. Additionally, adoption will be directly influenced by a number of financial factors, including the ability of providers to obtain sufficient reimbursement from third-party commercial payors, and the Centers for Medicare & Medicaid Services (“CMS”), for the professional services they provide in applying the Zio monitor and analyzing the Zio report. The efficacy, safety, performance and cost-effectiveness of our Zio service, on a stand-alone basis and relative to competing services, will determine the availability and level of reimbursement received by us and providers. Some payors do not have pricing contracts with us setting forth the Zio service reimbursement rates for us and providers. Physicians may be reluctant to prescribe the Zio service to patients covered by such non-contracted insurance policies because of the uncertainty surrounding reimbursement rates and the administrative burden of interfacing with patients to answer their questions and support their efforts to obtain adequate reimbursement for the Zio service. If physicians do not adopt and prescribe our Zio service, our revenue will not increase and our financial condition will suffer as a result.negative publicity.

If we are unable to keep up with demand for ~~the~~our Zio ~~service,~~Services, our revenue could be impaired, market acceptance for ~~the~~our Zio ~~service~~Services could be harmed, and physicians may instead ~~prescribe~~order our competitors’ ~~products and~~ services.

As demand for ~~the~~our Zio ~~service~~Services increases, we may encounter production or service delays or shortfalls. Such production or service delays or shortfalls may be caused by many factors, including the following:

•while we intend to continue to expand our manufacturing capacity, our production processes may have to change to accommodate this growth, potentially involving significant capital expenditures;

•we may experience technical challenges to increasing manufacturing capacity, including in connection with equipment design, automation, validation and installation, contractor issues and delays, licensing and permitting delays or rejections, materials procurement, manufacturing site expansion, problems with production yields and quality control and assurance;

•key components of ~~the~~our Zio ~~monitors~~Systems are provided by a sole or single supplier or limited number of suppliers, and we do not maintain large inventory levels of these components; if we experience a shortage or quality issues in any of these components, we would need to identify and qualify new supply sources, which could increase our expenses and result in manufacturing delays;

•global demand and supply factors concerning commodity components common to all electronic circuits, including Zio ~~monitors,~~Systems, could result in shortages that manifest as extended lead times for circuit boards, which could limit our ability to sustain and/or grow our business;

•~~shelter-in-place orders in effect in California and elsewhere due to the COVID-19 outbreak;~~

•we may experience a delay in completing validation and verification testing for new production processes and/or equipment at our manufacturing facilities;

•we are subject to state, federal and international regulations, including the FDA’s Quality System Regulation (“QSR”), the EU’s Medical Device Directive (“MDD”) and, as of May 2021, the EU’s Medical Device Regulation (“MDR”), and the developing regulations by Medicines & Healthcare Regulatory Agency (MHRA) post Brexit in the United Kingdom for both the manufacture of the Zio monitor and the provision of the Zio service, noncompliance with which could cause an interruption in our manufacturing and services;

•to increase our manufacturing output significantly and scale our services, we will have to attract and retain qualified employees for our operations; and

•in response to unexpectedly rapid growth of our business, clinical operations capacity may not meet demand while new resources are being recruited and trained, which ~~would delay the return of diagnostic reports to~~could negatively impact our ~~customers.~~volume capacity for our Zio Services.

~~Our inability~~If we were unable to successfully manufacture our Zio ~~monitors~~Systems in sufficient quantities, or to maintain sufficient capacity to provide ~~the~~our Zio ~~service in a timely manner, would~~Services, it could materially harm our business.

Our manufacturing facilities and processes and those of our third-party suppliers are subject to unannounced FDA, state and Notified Body regulatory inspections for compliance with the QSR, MDD, MDR, UK MDR requirements. Developing and maintaining a compliant quality system is time consuming and investment intensive. Failure to maintain compliance with, or not fully complying with the requirements of the FDA and state regulators could result in enforcement actions against us or our third-party suppliers, which could include the issuance of warning letters, adverse publicity, seizures, prohibitions on product sales, recalls and civil and criminal penalties, any one of which could significantly impact our manufacturing supply and provision of services and impair our financial results. Failure to maintain compliance with, or not fully complying with the requirements of MDD, MDR, and UK MDR could result in similar disruptions in these markets.

We depend on third-party vendors tofor the supply and manufacture ~~some~~of certain components of our ~~components, which could make us vulnerable to supply shortages and price fluctuations that could harm~~Zio Systems, as well as for other aspects of our ~~business.~~operations.

We rely on third-party vendors for components and sub-assemblies used in our Zio ~~monitors.~~Systems and in connection with certain logistical aspects of our Zio Services. Our reliance on third-party vendors subjects us to a number of risks, including:

•inability to obtain adequate supply in a timely manner or on commercially reasonable ~~terms;~~terms, including due to our reliance on a single supplier for certain critical components and materials for which, in some cases, there are relatively few alternative sources of supply;

•~~interruption of supply resulting from~~ modifications to, or discontinuation of, a ~~supplier’s~~vendor’s operations due to natural disasters, labor disruptions, human error, infrastructure failure, pandemics, military conflicts, or political or economic disruption, which may adversely impact our operations or otherwise lead to interruption of or shortage or delays in supply, including ~~those caused by pandemics such as COVID-19;~~shortages impacting our printed circuit board assembly;

•production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications;

•inability of the manufacturer or supplier to comply with our quality criteria and specifications and, where applicable, the QSR, state regulatory authorities, and, in some cases, the Notified Body audits;

•miscommunication of design specifications due to errors/omissions by either the vendor or our company, resulting in delayed delivery of acceptable ~~product;~~materials or components for incorporation into our devices;

•delays in ~~product~~device shipments resulting from ~~uncorrected~~quality issues or defects, reliability issues, or a supplier’s failure to consistently produce quality components;

•~~an outbreak of disease or similar public health threat, such as the existing threat of coronavirus, particularly as it may impact our supply chain;~~

•price fluctuations due to a lack of long-term supply arrangements with our suppliers for key components;

•inability to control the quality of products manufactured by third parties;

•delays in delivery by our suppliers due to changes in demand from us or their other customers; and

•delays in obtaining required materials and components that are in short supply within the time frames we require, at an affordable cost, or at all.

Further, we rely on single suppliers for the supply of our adhesive sub-assembly, disposable plastic housings, instruments and other materials that we use to manufacture and label our Zio patches. We have not qualified additional suppliers for some of these components and materials and we do not carry a significant inventory of these items. While we believe that alternative sources of supply may be available, we cannot be certain whether they will be available if and when we need them and that any alternative suppliers would be able to provide the quantity and quality of components and materials that we would need to manufacture our Zio patches if our existing suppliers were unable to satisfy our supply requirements.

Any significant delay or interruption in the supply of components or sub-assemblies, such as those that we have experienced during the COVID-19 pandemic, or our inability to obtain substitute components, sub-assemblies or materials from alternate sources at acceptable prices and in a timely manner could impair our ability to meet the demand for our Zio ~~service~~Services, significantly affect our future revenue and harm our ~~business.~~relations and reputation with physicians, hospitals, clinics, and patients.

~~Our revenue relies substantially~~We also rely on certain third-party vendors in connection with the analysis we perform to create diagnostic reports for our Zio ~~service,~~Services, which is ~~currently~~dependent upon a recording made by each Zio System. For long-term continuous monitoring utilizing our ~~only offering. If~~Zio XT System, for example, requires the ~~Zio service or future product offerings fail to gain, or lose, market acceptance, our business will suffer.~~

~~Our current revenue is dependent on prescriptions~~physical return of the Zio ~~service,~~XT patch to one of our clinical centers and we ~~expect that sales~~predominantly rely on the U.S. Postal Service (“USPS”) to perform this delivery service. Delivery of the Zio ~~service will account for substantially all~~XT patch to one of our ~~revenue~~clinical centers may be subject to disruption to the USPS delivery infrastructure. Further, for the ~~foreseeable future.~~MCT monitoring services utilizing our Zio AT System, we rely on the provision of cellular communication services for the timely transmission of patient information and reportable events. The reliability of the electronic communication and cloud services required for these operations are subject to natural disasters, labor disruptions, human error, and infrastructure failure. Any of these disruptions may render it difficult or temporarily impossible for us to provide some or all our Zio Services and bill for those services, adversely affecting our operating results, causing significant distraction for management, and negatively impacting our business reputation. We also expect that our reliance on third-party vendors will increase as our business grows, exposing us to increased harm if such disruptions occur.

Our ability to compete depends on our ability to innovate successfully.

The market for medical devices, including the remote cardiac monitoring segment, is competitive, dynamic, and marked by rapid and substantial technological development and product innovation. While there are barriers that would challenge new entrants or existing competitors from developing products that compete directly with the devices used in ~~various stages of research and development for other diagnostic screening solutions and new indications~~our Zio Services, these barriers can be overcome. Demand for our ~~technology~~Zio Services and ~~the Zio service; however, there can~~future related devices or services could be ~~no assurance that we will be able to successfully develop~~diminished by equivalent or superior products and ~~commercialize any new products or services. Any new products may not be accepted~~technologies offered by physicians or may merely replace revenue generated by our Zio service and not generate additional revenue. If we have difficulty launching new products, our reputation may be harmed and our financial results adversely affected. In order to substantially increase our revenue, we will need to target physicians other than cardiologists, such as emergency room doctors, primary care physicians and other physicians with whom we have had little contact and may require a different type of selling effort.competitors. If we are unable to ~~increase prescriptions of the Zio service, expand reimbursement for the Zio service, or~~innovate successfully, ~~develop and commercialize new products and services, our revenue and our ability to achieve and sustain profitability would be impaired.~~

~~Our quarterly and annual results may fluctuate significantly and may not fully reflect the underlying performance of our business.~~

Our quarterly and annual results of operations, including our revenue, profitability and cash flow, may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter or period should not be relied upon as an indication of future performance. Our quarterly and annual financial results may fluctuate as a result of a variety of factors, many of which are outside our control and, as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly and annual results may decrease the value of our common stock. Factors that may cause fluctuations in our quarterly and annual results include, without limitation:

•~~market awareness and acceptance of the Zio service;~~

•~~our ability to get payors under contract at acceptable reimbursement rates;~~

•~~the availability of reimbursement for the Zio service at acceptable rates through government programs;~~

•~~our ability to attract new customers and improve our business with existing customers;~~

•~~results of our clinical trials and publication of studies by us, competitors or third parties;~~

•the timing and success of new product introductions by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners;

•~~the amount and timing of costs and expenses related to the maintenance and expansion of our business and operations;~~

•~~changes in our pricing policies or those of our competitors;~~

•~~general economic, industry and market conditions;~~

•~~the impact of the COVID-19 pandemic on our operations and financial results;~~

•~~the regulatory environment;~~

•~~expenses or loss of sales associated with unforeseen product quality issues;~~

•~~timing of physician prescriptions and demand for our Zio service;~~

•seasonality factors, such as patient and physician vacation schedules, severe weather conditions and insurance deductibles, that hamper or otherwise restrict when a patient seeking diagnostic services such as the Zio service visits the prescribing physician;

•~~the hiring, training and retention of key employees, including our ability to expand our sales team and clinical operations team;~~

•~~litigation or other claims against us for intellectual property infringement or otherwise;~~

•~~our ability to obtain additional financing as necessary; and~~

•~~advances and trends in new technologies and industry standards.~~

Because our quarterly results may fluctuate, period-to-period comparisons may not be the best indication of the underlying results of our business and should only be relied upon as one factor in determining how our business is performing.

~~We have noticed seasonality in the use of our Zio service which, along with other factors such as severe weather, may cause quarterly fluctuations in our revenue.~~

During the summer months and the holiday season, we have observed that the use of our Zio service decreases, which reduces our revenue during those periods. We believe that the decrease in demand may result from physicians or their patients taking vacations. Severe weather conditions or natural disasters also may hamper or otherwise restrict when patients seeking diagnostic services, such as the Zio service, visit prescribing physicians. Similarly, we generally experience some effects of seasonality due to the renewal of insurance deductibles at the beginning of the calendar year. These factors may cause our results of operations to vary from quarter to quarter.

Reimbursement by CMS is highly regulated and subject to change; our failure to comply with applicable regulations could result in decreased revenue and may subject us to penalties or have an adverse impact on our business.

For the three months ended March 31, 2022, we received approximately 22% of our revenue from reimbursement for our Zio service by CMS. Under CMS guidelines for participation in the Medicare program CMS designates us as an independent diagnostic treatment facility (“IDTF”). CMS imposes extensive and detailed requirements on IDTFs, including but not limited to, rules that govern how we structure our relationships with physicians, how and when we submit reimbursement claims, how we operate our monitoring facilities and how and where we provide our monitoring solutions. Our failure to comply with applicable CMS rules could result in a discontinuation of our reimbursement under the CMS payment programs, our being required to return funds already paid to us, civil monetary penalties, criminal penalties and/or exclusion from the CMS programs.

~~Changes in public health insurance coverage and CMS reimbursement rates for the Zio service could affect the adoption and profitability of our Zio service.~~

Government payors may change their coverage and reimbursement policies, as well as payment amounts, in a way that would prevent or limit reimbursement for our Zio service, which would significantly harm our business. Government and other third-party payors require us to report the service for which we are seeking reimbursement by using a Current Procedural Terminology (“CPT”) code-set maintained by the American Medical Association (“AMA”). For Zio XT, we had historically utilized temporary CPT codes (or Category III CPT codes), used for newly introduced technologies specific to our category of diagnostic monitoring. The process to convert Category III CPT codes to Category I CPT codes is governed by the AMA and CMS. On October 25, 2019, the AMA’s CPT Editorial Panel established two new Category I CPT codes which are applicable to the Zio service and took effect on January 1, 2021.

In November 2021, CMS published its Calendar Year 2022 Medicare Physician Fee Schedule Final Rule (the “2022 Final Rule”). In the Final Rule, CMS did not issue national pricing and continued carrier pricing for calendar year 2022 on Category I CPT codes 93241, 93243, 93245 and 93247 for extended external ECG monitoring, the relevant codes for our Zio XT service. These codes were designated by CMS for contractor pricing in calendar 2022, which means that prices will be determined regionally by each Medicare Administrative Contractor (“MAC” or “MACs”).

Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through a national coverage determination (“NCD”) by CMS, or at the local level through a local coverage determination (“LCD”), by one or more of the regional MACs who are private contractors that process and pay claims on behalf of CMS for different regions. In the absence of a specific NCD, as is the case with Zio XT historically and for Calendar Year 2022 following the Final Rule, the MAC with jurisdiction over a specific geographic region will have the discretion to make an LCD. The Company is seeking to establish LCD pricing with one or more MACs to establish pricing for 2022 and will be subject to LCD pricing until such time CMS establishes a NCD.

In January 2022, Novitas Solutions, the MAC which covers the region where our Independent Diagnostic Testing Facility (“IDTF”) in Houston, Texas is located and where almost all of our Medicare services for Zio XT are processed, updated reimbursement rates for CPT codes 93243 and 93247 for the Houston jurisdiction to $223 and $233, respectively. These updated rates are retroactive to January 1, 2022. These rates were higher than the rates posted by Novitas in 2021, but continue to be significantly below our historical Medicare rates for our Zio XT service. In April 2022, National Government Services or NGS, the MAC which covers the region where our IDTF in Lincolnshire, Illinois is located, updated reimbursement rates for

~~CPT codes 93243 and 93247 for the Suburban Chicago jurisdiction to $334 and $347, respectively.These updated rates are retroactive to April 1, 2022.These rates are higher than our historical Medicare rates for out Zio XT service.~~

We remain engaged with all of the MACs and are working with other industry participants to submit additional cost data on long-term continuous electrocardiogram (“ECG”) monitoring for consideration to establish appropriate local rates. We cannot provide certainty at this time on the potential outcome of the discussions with the MACs or on the timing of any action to be taken.

Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through a national coverage determination (“NCD”) by CMS, or at the local level through a local coverage determination (“LCD”), by one or more of the regional MACs who are private contractors who establish and write LCD policies and process and pay claims on behalf of CMS for different regions. In the absence of a specific NCD, the MAC with jurisdiction over a specific geographic region will have the discretion to make an LCD. If Novitas Solutions were to change, limit or cease to cover the Zio service by altering the existing LCD, it would negatively impact our revenue from CMS.

Given the evolving nature of the healthcare industry and ongoing healthcare cost reforms, we are and will continue to be subject to changes in the level of Medicare coverage for our products, and unfavorable coverage determinations at the national or local level could adversely affect our business and results of operations.

Further, a reduction in coverage by Medicare could cause some commercial third-party payors to implement similar reductions in their coverage or level of reimbursement of the Zio service. Given the evolving nature of the healthcare industry and ongoing healthcare cost reforms, we will continue to be subject to changes in the level of Medicare coverage for its products, and unfavorable coverage determinations at the national or local level could adversely affect its results of operations. Although a large majority of commercial customers have re-contracted the Zio XT service at pre-existing rates since the establishment of the Category I codes on January 1, 2021, if we are unsuccessful in improving the Medicare rates, we believe that commercial rates may begin to be more negatively impacted.

As a result of the CPT code changes that took effect January 1, 2021, the number of claims from the first half of 2021 which contained differences between the submitted price and reimbursement rate and overall denials increased significantly compared to our historical experience as a result of CPT code transition issues with the payors. We continue to work with the payors to collect on these claims and the collection cycle for these claims is significantly longer than usual and may lead to higher write-offs of doubtful accounts for those periods and negatively impact our results of operations.

If we are unable to achieve a level of revenues adequate to support our cost structure, or is unable to reduce our overall cost structure, this would raise substantial doubts about our ability to continue as a going concern.

Controls imposed by CMS and commercial third-party payors designed to reduce costs, commonly referred to as “utilization review”, may affect our operations. Federal law contains numerous provisions designed to ensure that services rendered to CMS patients meet professionally recognized standards and are medically necessary, appropriate for the specific patient and cost-effective. These provisions include a requirement that a sampling of CMS patients must be reviewed by quality improvement organizations, which review the appropriateness of product prescriptions, the quality of care provided, and the appropriateness of reimbursement costs. Quality improvement organizations may deny payment for services or assess fines and also have the authority to recommend to the U.S. Department of Health and Human Services, that a provider which is in substantial noncompliance with the standards of the quality improvement organization be excluded from participation in the Medicare program. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (the “Affordable Care Act”), potentially expands the use of prepayment review by Medicare contractors by eliminating statutory restrictions on their use, and, as a result, efforts to impose more stringent cost controls are expected to continue. Utilization review is also a requirement of most non-governmental managed care organizations and other third-party payors. To date these controls have not had a significant effect on our operations, but significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material, adverse effect on our business, financial position and results of operations in the future.

~~Each state’s Medicaid program has its own coverage determinations related to~~ our services and ~~some state Medicaid programs do not provide their recipients with coverage for~~related devices could become obsolete and our ~~Zio service. Even if~~revenue would decline as our ~~Zio service is covered by a state Medicaid program,~~customers prescribe or purchase our competitors’ services.

In order to remain competitive, we must ~~be recognized as a Medicaid provider by the state in which the Medicaid recipient receiving the services resides in order for us~~continue to ~~be reimbursed by a state’s Medicaid program. Even if we are recognized as a provider in a state, Medicare’s rate for our Zio service may be low,~~develop new product offerings and ~~the Medicaid reimbursement amounts are sometimes as low, or lower, than~~

~~the Medicare reimbursement rate. In addition, and as noted above, each state’s Medicaid program has its own coverage determinations related~~enhancements to our Zio service, and many state Medicaid programs do not provide their recipients with coverage for our Zio service. As a result of all of these factors, our Zio service is not reimbursed or only reimbursed at a very low dollar amount by many state Medicaid programs. In some cases, a state Medicaid program’s reimbursement rate for our Zio service might be zero dollars. Additionally, certain states may require Medicaid recipients to pay for part of the Zio Service, and since the recipients of Medicaid are low income individuals, we are often unable to collect any amounts directly from individual recipients of the Zio service covered by Medicaid. Low or zero dollar Medicaid reimbursement rates for our Zio service would have an adverse effect on our business, gross margins and revenues. Most of the Zio services we provide are reimbursed through Medicare or private third party payors and not Medicaid, but if that were to change in the future, or the percentage of Zio services provided to Medicaid recipients were to increase, our gross margins would be adversely affected as a result.

Also, healthcare reform legislation or regulation may be proposed or enacted in the future that may adversely affect such policies and amounts. Changes in the healthcare industry directed at controlling healthcare costs or perceived over-utilization of ambulatory cardiac monitoring products and services could reduce the volume of Zio services prescribed by physicians. If more healthcare cost controls are broadly instituted throughout the healthcare industry, the volume of cardiac monitoring solutions prescribed could decrease, resulting in pricing pressure and declining demand for our Zio service.Services. We cannot predict whether and to what extent existing coverage and reimbursement will continue to be available. If physicians, hospitals and clinics are unable to obtain adequate coverage and government reimbursement of the Zio service, they are significantly less likely to use the Zio service and our business and operating results would be harmed.

In addition, any changes to, or repeal of, the Affordable Care Act or its implementing regulations may have a material adverse effect on our results of operations. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States may have on our business.

If third-party commercial payors do not provide any or adequate reimbursement, including as a result of the CMS and MAC reimbursement rates for our Zio XT service, rescind or modify their reimbursement policies or delay payments for our products, including the Zio service, or if we are unable to successfully negotiate reimbursement contracts, our commercial success could be compromised.

We receive a substantial portion of our revenue from third-party private commercial payors, such as medical insurance companies. These commercial payors may reimburse our products, including the Zio service, at inadequate rates, suspend or discontinue reimbursement at any time, impose requirements that may result in a greater number of denied claims, or require or increase co-payments from patients. The recent actions taken by CMS and MACs to reduce the reimbursement rates for use of the Zio XT service by Medicare patients could influence the price that commercial payors are willing to pay for our Zio service. Contracts with commercial payors, which set forth the Zio XT service reimbursement rates for us and prescribing physicians could be terminated or payors could seek to renegotiate them at any time to try to obtain pricing at reduced amounts at or near the Novitas Solutions reimbursement rates. Some payors do not have contracts with us and others that are already in the process of negotiating contracts may look to negotiate lower reimbursement rates for the Zio XT service in response to actions taken by Novitas Solutions. Any such actions could have a significant and adverse effect on our revenue and the revenue of physicians who prescribe our Zio service. Physicians may not prescribe our Zio service unless payors reimburse a substantial portion of the submitted costs, including the physician’s, hospital’s or clinic’s charges related to the application of certain products, including the Zio monitor and the interpretation of results which may inform a diagnosis. Additionally, certain payors may require that physicians prescribe another arrhythmia diagnostic monitoring option prior to prescribing the Zio service. There is significant uncertainty concerning third-party reimbursement of any new product or service until a contracted rate is established. Reimbursement by a commercial payor may depend on a number of factors, including, but not limited to, a payor’s determination that the prescribed service is:

•~~not experimental or investigational;~~

•~~appropriate for the specific patient;~~

•~~cost effective;~~

•~~supported by peer-reviewed publications; and~~

•~~accepted and used by physicians within their provider network.~~

Since each payor makes its own decision as to whether to establish a policy concerning reimbursement or enter into a contract with us to set the price of reimbursement, seeking reimbursement on a payor-by-payor basis is a time consuming and costly process to which we dedicate substantial resources. If we do not dedicate sufficient resources to establishing contracts with

third-party commercial payors, or continue to validate the clinical value of Zio services through studies and physician adoption, the amount that we are reimbursed for our products may decline, our revenue may become less predictable, and we will need to expend more efforts on a claim-by-claim basis to obtain reimbursement for our products.

A substantial portion of our revenue is derived from third-party commercial payors who have pricing contracts with us, which means that the payor has agreed to a defined reimbursement rate for our services. These contracts provide a high degree of certainty to us, physicians, clinics and hospitals with respect to the rate at which our services will be reimbursed. These contracts also impose a number of obligations regarding billing and other matters, and our noncompliance with a material term of such contracts may result in termination of the contract and loss of any associated revenue. We expect to continue to dedicate resources to maintaining compliance with these contracted payors, to ensure payors acknowledge and are aware of the clinical and economic value of our services and the interest on the part of physicians, clinics and hospitals who use our services and participate in their provider networks; however, we can provide no assurance that we will retain any given contractual payor relationship. A loss of these pricing contracts can increase the uncertainty of reimbursement of claims from third-party payors.

A portion of our revenue is derived from third-party commercial payors without such contracts in place. Without a contracted rate, reimbursement claims for our products are often denied upon submission, and we or our billing partner, XIFIN, Inc. (“XIFIN”), must appeal the denial. The appeals process is time-consuming and expensive, and may not result in full or any payment. In cases where there is no contracted rate for reimbursement it may be more difficult for us to acquire new accounts with physicians, clinics and hospitals. In addition, in the absence of a contracted rate, there is typically a greater out-of-network, co-insurance or co-payment requirement which may result in payment delays or decreased likelihood of full collection. In some cases involving non-contracted insurance companies, we may not be able to collect any amount or only a portion of the invoiced amount for our services.

~~We expect to continue to dedicate resources to establishing pricing contracts with non-contracted insurance companies; however, we~~ can provide no assurance that we will be successful in ~~obtaining~~fully recognizing the strategic value of our ECG database, expanding the indications for our Zio Services, developing new services and related devices, or commercializing them in ways that achieve market acceptance. In addition, if we develop new services, sales of those services may reduce revenue generated from our existing services. Maintaining adequate research and development personnel and resources to meet the demands of the market is essential. If we are unable to develop new services and related devices, applications, or features, or improve our algorithms due to constraints, such ~~pricing contracts~~as insufficient cash resources, high employee turnover, inability to hire personnel with sufficient technical skills, or a lack of other research and development resources, we may not be able to maintain our competitive position compared to other companies. Furthermore, many of our competitors devote a considerably greater amount of funds to their research and development programs than we do, and those that do not may be acquired by larger companies that would allocate greater resources to research and development programs. Our failure or inability to devote adequate research and development resources or compete effectively with the research and development programs of our competitors could harm our business.

We have entered into a development agreement with a third-party that may not result in the development of commercially viable devices or the generation of significant future revenues. We may explore or enter into other development or collaboration agreements with other third parties, and these similarly may not result in development of commercially viable devices or services or the generation of significant future revenues.

We have entered into the Development Agreement with Verily to develop certain next-generation Afib screening, detection, or monitoring devices to enhance our Zio Services, which involves combining our technology platforms and capabilities with those of Verily. As part of the Development Agreement, we paid Verily an up-front fee of $5.0 million in cash, and through December 31, 2022 and March 31, 2023 , we have achieved milestones and additional related payment obligations totaling $11.0 million. We have agreed to make additional payments over the term of the Development Agreement up to an aggregate of $1.75 million, subject to the achievement of certain development and regulatory milestones. The success of our collaboration with Verily is highly dependent on the efforts provided to the collaboration by Verily and us and the skill sets of our respective employees. Support of these efforts requires significant resources, including research and development, manufacturing, quality assurance, and clinical and regulatory personnel. Even with the FDA’s clearance of our clinically-integrated ZEUS System for the Zio Watch, continued product testing, market research, and related activities may result in a delay to device launch and additional expense associated with any commercialization efforts. Even if and when launched, the developed devices may also not be accepted in the marketplace, and there is no assurance that adequate coverage or reimbursement would be available, or that ~~such pricing contracts~~an alternative payment model can be developed.

After the initial term and scope of the Development Agreement, and in order to commercialize any services in connection with the developed devices with Verily, we will ~~contain reimbursement for our services at rates~~need to enter into a commercialization agreement. There is no guarantee that ~~are favorable to us. If we fail to establish these contracts,~~ we will be able to ~~recognize revenue only based~~enter into such an agreement on ~~an estimated average collection rate per historical cash collections.~~commercially reasonable terms or at all. If we are unable to reach agreement with Verily on terms, the up-front fee and regulatory and development milestone payments and our internal development costs would not be recovered and the licenses to use Verily’s technology will expire.

This collaboration may not result in the development of devices, and ultimately services, that achieve commercial success and could be terminated prior to developing any devices. In ~~addition, XIFIN may need to expend significant resources obtaining reimbursement on a claim-by-claim basis and in adjudicating claims which are denied altogether~~the event of any termination or ~~not reimbursed at acceptable rates. We currently pay XIFIN a percentage~~expiration of the ~~amounts~~Development Agreement, we may be required to devote additional resources to device development and we may face increased competition, including from Verily. Verily may use the experience and insights it ~~collects on our behalf and this percentage may increase~~develops in the ~~future if it needs~~course of the collaboration with us to ~~expend more resources in adjudicating such claims. We sometimes informally engage physicians, hospitals~~initiate or accelerate their development of products that compete with our devices and ~~clinics to help establish contracts with third-party payors who insure their patients. We~~services, which may create competitive disadvantages for us. Accordingly, we cannot provide ~~any~~ assurance that ~~such physicians, hospitals~~our collaboration with Verily or any other third party will result in the successful development of commercially viable devices and ~~clinics~~services or result in significant additional future revenues for our company.

We generally intend to continue assessing the potential pathways for expanding indications and use cases for our Zio Services, and developing potential new products and services, for patient populations with unmet needs in the ambulatory cardiac monitoring market and adjacent markets. We will continue to ~~help us establish contracts~~invest in research and development efforts to further differentiate our biosensor, data analytics and reporting, information system and digital platform; we may explore or enter into development or collaboration agreements with third parties to further these efforts. We cannot predict whether such efforts will be viable from a regulatory and commercial standpoint, and development or collaboration agreements may not result in the ~~future. If~~development of commercially viable products or services or the generation of significant future revenues.

International expansion of our business exposes us to market, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.

While we ~~fail~~currently derive substantially all of our revenue and maintain substantially all of our assets in the United States, we intend to ~~establish contracts~~continue to pursue growth opportunities outside of the United States, especially in the Philippines and the United Kingdom, and we may increase our use of administrative and support functions from locations outside the United States, which could expose us to risks associated with international sales and operations. Additionally, our international expansion efforts may not be successful, we may experience difficulties in scaling these functions from locations outside the United States, and we may not experience the expected cost efficiencies.

Our international operations are, and will continue to be, subject to a number of risks, including:

•multiple, conflicting and changing laws and regulations such as tax laws, privacy laws, export and import restrictions, employment laws, regulatory requirements, and other governmental approvals, permits, and licenses;

•obtaining and sustaining regulatory approvals, certifications, and regulatory compliance where required for the sale of our Zio Services in various countries;

•requirements to maintain data and the processing of that data on servers located within such countries;

•complexities associated with managing multiple payor reimbursement regimes, government payors, or patient self-pay systems;

•logistics and regulations associated with shipping and returning our Zio patches following use;

•limits on our ability to penetrate international markets if we are required to process our Zio Services locally;

•financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the effect of local and regional financial pressures on demand and payment for our services, fluctuations in trade policy and tariff regulations, changes in international tax regulations applicable to our business, and exposure to foreign currency exchange rate fluctuations, which may reduce the reported value of our foreign currency denominated revenues, expenses, and cash flows;

•decreased emphasis or enforcement or intellectual property protections in some countries outside the United States in comparison to that in the United States;

•increased risk of litigation or administrative proceedings in connection with our relationships with international business partners, including litigation against persons whom we believe have infringed on our intellectual property, infringement litigation filed against us, litigation against a competitor, or litigation filed against us by distributors or service providers resulting from a breach of contract or other claim, as well as disputes regarding government and public tenders, any of which may result in substantial costs to us, adverse judgments, settlements, and diversion of our management’s attention;

•natural disasters, political and economic instability, including wars, terrorism, political unrest, outbreak of disease, boycotts, curtailment of trade, and other market restrictions;

•regulatory and compliance risks that relate to maintaining accurate information and control over activities subject to regulation under the FCPA, UK Bribery Act of 2010, and comparable laws and regulations in other countries;

•compliance risks associated with the GDPR (including as it applies in the United Kingdom by virtue of the Data Protection Act 2018), enacted to protect the privacy of all individuals in the European Union and the United Kingdom, and which places certain restrictions on the export of personally identifiable data outside of the European Union or the United Kingdom, as applicable;

•compliance risks associated with the revised regulations in the EU MDR that outline the requirements for medical device CE marking; and

•compliance risks associated with the UK MDR, which replaced the CE marking requirements for medical devices marketed and sold in the United Kingdom with a UKCA mark following the United Kingdom’s withdrawal from the European Union.

Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenue and results of operations.

Exposure to United Kingdom political developments, including the outcome of its withdrawal from membership in the European Union, could be costly and difficult to comply with and could seriously harm our business.

Our operations in the United Kingdom account for approximately 1% of our revenue for the three months ended March 31, 2023 and we intend to continue to pursue growth opportunities in the United Kingdom. There are still a number of areas of uncertainty in connection with the future of the United Kingdom and its relationship with the European Union following the United Kingdom’s exit from the European Union in 2020 (commonly referred to as “Brexit”), including the application and interpretation of the UK-EU trade agreement (the “Trade and Cooperation Agreement”), which went into force in May 2021. For example, because a significant proportion of the regulatory framework in the United Kingdom is currently derived from EU directives and regulations, Brexit could result in material changes to the regulatory regime applicable to many of our current operations. The UK government and the MHRA began undertaking public consultations on the future regulation of medical devices in 2022 and plan to introduce the new regulatory system at the beginning of July 2024. Although the Trade and Cooperation Agreement offers UK and EU companies preferential access to each other’s markets, ensuring imported goods will be free of tariffs and quotas, economic relations between the United Kingdom and the European Union are on more ~~third-party payors~~restricted terms than existed previously. Therefore, at this time, we cannot predict the impact that the Trade and Cooperation Agreement and any future agreements contemplated under the terms of the Trade and Cooperation Agreement will have on our future business efforts to commercialize our Zio Services in the United Kingdom and the European Union. Accordingly, it is possible that the Trade and Cooperation Agreement may adversely affect our operations and financial results.

Our success depends on our ability to ~~increase~~attract and retain senior management and key personnel.

Our success depends on our ~~revenue.~~ability to retain our senior management and to attract and retain qualified personnel in the future. Competition for senior management personnel, as well as salespersons, scientists, clinicians, and engineers, is intense and we may not be able to retain our personnel. The loss of key personnel, including key members of our senior management team or members of our board of directors, as well as certain of our key finance, legal, regulatory, research and development, and clinical personnel, could disrupt our operations and have a material and adverse effect on our ability to grow our business. Each of our officers may terminate their employment at any time without notice and without cause or good reason. The loss of a member of our senior management team or our professional staff would require the remaining executive officers to divert immediate and substantial attention to seeking a replacement.

We have recently experienced significant changes in our executive leadership, including the appointment of Quentin S. Blackford as our President and Chief Executive Officer in October 2021 following the resignation of our prior President and Chief Executive Officer, Kevin King, in January 2021. Douglas Devine, our Chief Operating Officer, and Michael Coyle served as Chief Executive Officer from June 2021 to October 2021 and January 2021 to June 2021, respectively, before Mr. Blackford’s appointment. We have had additional executive officer positions changes during the three months ended March 31, 2023 (including the March 2023 resignation of Douglas Devine as Chief Operating Officer) and may experience further changes in executive leadership in the future.

Changes to strategic or operating goals, which can often times occur with the appointment of new executives, can create uncertainty, may negatively impact our ability to execute quickly and effectively, and may ultimately be unsuccessful. If we do not integrate new executives successfully, we may be unable to manage and grow our business, and our financial condition and profitability may suffer as a result. In addition, a failure to enter into contracts could affect a physician’s willingness to prescribe our services because of the administrative work involved in interacting with patients to answer their questions and help them obtain reimbursement for our services. If physicians are unwilling to prescribe our services due to the ~~lack~~extent we experience additional management turnover, competition for top management is high and it may take months to find a candidate that meets our requirements. If we are unable to attract and retain qualified management personnel, our business could suffer.

Further, we may undertake reorganizations of ~~certainty~~our workforce from time to time, which may result in a temporary reduction in the number of employees in certain locations. We would undertake a reorganization to reduce operating expenses or achieve other business objectives, though we cannot guarantee any specific amount of long-term cost savings. Further, the turnover in our employee base could result in operational and administrative work involved with patients covered by non-contracted insurance companies, or patients covered by non-contracted insurance companies are unwilling to risk that their insurance may charge additional out-of-pocket fees,inefficiencies, which could adversely impact the results of our ~~revenue~~operations, stock price, and customer relationships, and could ~~decline or fail to increase.~~make recruiting for future management and other positions more difficult.

Our continued rapid growth could strain our personnel resources and infrastructure, and if we are unable to manage the anticipated growth of our business, our future revenue and operating results may be harmed.

We have experienced rapid growth in our headcount and in our operations. Any growth that we experience in the future will provide challenges to our organization, requiring us to expand our sales personnel, manufacturing, clinical, customer care, and billing operations and general and administrative infrastructure. In addition to the need to scale our operational and service capacity, future growth will impose significant added responsibilities on management, including the need to identify, recruit, train, and integrate additional employees. Rapid expansion in personnel could ~~mean that less experienced people~~impact our capacity to manufacture our Zio ~~monitors,~~patches, market, sell and support our Zio ~~service,~~Services, and analyze the data to produce Zio reports, which could result in inefficiencies and unanticipated costs, ~~reduced quality in either~~impacts to our Zio ~~reports or manufactured devices,~~Services, including our Zio patches, and disruptions to our service operations. Additionally, rapid expansion could require us to rely on overtime to increase capacity that could, in turn, result in greater employee attrition and/or a loss in productivity during the process of recruiting and training additional resources and add to our operating expenses.

As we seek to gain greater efficiency, we may look for ways to expand the automated portion of our Zio ~~service~~Services and require productivity improvements from our ~~certified cardiographic technicians.~~CCTs, within the framework of our wide-ranging regulatory obligations. Such improvements could ~~compromise~~impact the ~~quality~~content of our Zio reports. In addition, rapid and significant growth may strain our administrative and operational infrastructure. Our ability to manage our business and growth will require us to continue to improve our operational, financial, and management controls,

reporting systems, and procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our business could be harmed.

~~If we are unable to support demand for the Zio service or any of our future products or services, our business could suffer.~~

As demand for the Zio service or any of our future products or services increases, we will need to continue to scale our manufacturing capacity and algorithm processing technology, expand customer service, billing and systems processes and enhance our internal quality assurance program. We will also need additional certified cardiographic technicians and other personnel to process higher volumes of data. We cannot assure you that, with any increases in scale, required improvements will be successfully implemented, quality assurance will be maintained, or that appropriate personnel will be available to facilitate growth of our business. Failure to implement necessary procedures, transition to new processes or hire the necessary personnel could result in higher costs of processing data or inability to meet increased demand. There can be no assurance that we will be able to perform our data analysis on a timely basis at a level consistent with demand, quality standards and physician expectations. If we encounter difficulty meeting market demand, quality standards or physician expectations, our reputation could be harmed and our future prospects and business could suffer.

~~We plan to introduce new products and services and our business will be harmed if we are not successful in selling these new products and services to our existing customers and new customers~~

We have received FDA clearance for our Zio AT ECG Monitoring System, (“Zio AT”), which is designed to provide timely transmission of data during the wear period. However, we do not yet know whether Zio AT or any other new products and services will be well received and broadly adopted by physicians and their patients or whether sales will be sufficient for us to offset the costs of development, implementation, support, operation, sales and marketing. Although we have performed extensive testing of our new products and services, their broad-based implementation may require more support than we anticipate, which would further increase our expenses. Additionally, new products and services may subject us to additional risks of product performance, customer complaints and litigation. If sales of our new products and services are lower than we expect, or if we expend additional resources to fix unforeseen problems and develop modifications, our operating margins are likely to decrease.

We rely on single suppliers for some of the materials used in our products, and if any of those suppliers are unable or unwilling to produce these materials or supply them in the quantities that we need at the quality we require, we may not be able to find replacements or transition to alternative suppliers before our business is materially impacted.

We rely on single suppliers for the supply of our adhesive sub-assembly, disposable plastic housings, instruments and other materials that we use to manufacture and label our Zio monitors. These components and materials are critical and, in some cases, there are relatively few alternative sources of supply. We have not qualified additional suppliers for some of these components and materials and we do not carry a significant inventory of these items. While we believe that alternative sources of supply may be available, we cannot be certain whether they will be available if and when we need them and that any alternative suppliers would be able to provide the quantity and quality of components and materials that we would need to manufacture our Zio monitors if our existing suppliers were unable to satisfy our supply requirements. To utilize other supply sources, we would need to identify and qualify new suppliers to our quality standards, which could result in manufacturing delays and increase our expenses. Any supply interruption, such as those that we have experienced during the COVID-19 pandemic, could limit our ability to manufacture our products and could therefore harm our business, financial condition and results of operations. If our current suppliers and any alternative suppliers do not provide us with the materials we need to manufacture our products or perform our services, if the materials do not meet our quality specifications, or if we cannot obtain acceptable substitute materials, an interruption in our Zio service could occur. Any such interruption may significantly affect our future revenue and harm our relations and reputation with physicians, hospitals, clinics and patients.

If our manufacturing facility becomes damaged or inoperable, or if we are required to vacate the facility, we may be unable to manufacture and ship our Zio monitors, or we may experience delays in production or an increase in costs which could adversely affect our results of operations.

We currently manufacture and assemble the Zio monitors in only one location. Our products are comprised of components sourced from a variety of contract manufacturers, with final assembly completed at our facility in Cypress, California. Our facility and equipment, or those of our suppliers, could be harmed or rendered inoperable by natural or man-made disasters, including fire, earthquake, terrorism, pandemic outbreaks, flooding and power outages. Any of these may render it difficult or impossible for us to manufacture new products, ship assembled products, and/or receive returned units for some period of time. If our Cypress facility is inoperable for even a short period of time, the inability to manufacture, ship and receive our Zio monitors, and the interruption in research and development of any future products, may result in harm to our reputation,

increased costs, the loss of orders and lower revenue. Furthermore, it could be costly and time consuming to repair or replace our facilities and the equipment we use to perform our research and development work and manufacture our products.

~~If we fail to increase our sales and marketing capabilities and develop broad brand awareness in a cost effective manner, our growth will be impeded and our business may suffer.~~

We plan to continue to expand and optimize our sales and marketing infrastructure in order to increase our prescribing physician base and our business. Identifying and recruiting qualified personnel and training them in the application of the Zio service, on applicable federal and state laws and regulations and on our internal policies and procedures requires significant time, expense and attention. It often takes several months or more before a sales representative is fully trained and productive. Our business may be harmed if our efforts to expand and train our sales force do not generate a corresponding increase in revenue. In particular, if we are unable to hire, develop and retain talented sales personnel or if new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenue.

Our ability to increase our customer base and achieve broader market acceptance of our products will depend, to a significant extent, on our ability to expand our marketing efforts. We plan to dedicate significant resources to our marketing programs. Our business may be harmed if our marketing efforts and expenditures do not generate a corresponding increase in revenue.

In addition, we believe that developing and maintaining broad awareness of our brand in a cost effective manner is critical to achieving broad acceptance of the Zio service and penetrating new accounts. Brand promotion activities may not generate patient or physician awareness or increase revenue, and even if they do, any increase in revenue may not offset the costs and expenses we incur in building our brand. If we fail to successfully promote, maintain and protect our brand, we may fail to attract or retain the physician acceptance necessary to realize a sufficient return on our brand building efforts, or to achieve the level of brand awareness that is critical for broad adoption of the Zio service.

~~Billing for our Zio service is complex, and we must dedicate substantial time and resources to the billing process.~~

Billing for IDTF services is complex, time consuming and expensive. Depending on the billing arrangement and applicable law, we bill several types of payors, including CMS, third-party commercial payors, institutions and patients, which may have different billing requirements procedures or expectations. We also must bill patient co-payments, co-insurance and deductibles. We face risk in our collection efforts, including potential write-offs of doubtful accounts and long collection cycles, which could adversely affect our business, financial condition and results of operations.

~~Several factors make the billing and collection process uncertain, including:~~

•~~differences between the submitted price for our Zio service and the reimbursement rates of payors;~~

•~~compliance with complex federal and state regulations related to billing CMS;~~

•~~differences in coverage among payors and the effect of patient co-payments, co-insurance and deductibles;~~

•~~differences in information and billing requirements among payors; and~~

•~~incorrect or missing patient history, indications or billing information.~~

As a result of the CPT code changes that took effect January 1, 2021, the number of claims from the first half of 2021 which contained differences between the submitted price and reimbursement and overall denials increased significantly compared to our historical experience as a result of CPT code transition issues with the payors. We continue to work with the payors to collect on these claims and the collection cycle for these claims is significantly longer than usual and may lead to higher write-offs of doubtful accounts for those periods and negatively impact our results of operations.

Additionally, our billing activities require us to implement compliance procedures and oversight, train and monitor our employees and undertake internal review procedures to evaluate compliance with applicable laws, regulations and internal policies. Payors also conduct audits to evaluate claims, which may add further cost and uncertainty to the billing process. These billing complexities, and the related uncertainty in obtaining payment for our Zio service, could negatively affect our revenue and cash flow, our ability to achieve profitability, and the consistency and comparability of our results of operations.

The operation of our call centers and monitoring facilities is subject to rules and regulations governing IDTFs; failure to comply with these rules could prevent us from receiving reimbursement from CMS and some commercial payors.

In order to be a participating provider in the Medicare program, and to be reimbursed by CMS under the program, we established an independent diagnostic treatment facility (or “IDTF”). An IDTF is a “provider-type” designation under Medicare, defined by CMS as an entity(ies) independent of a hospital or physician’s office in which diagnostic tests are performed by licensed or certified nonphysician personnel under appropriate physician supervision. Our IDTFs are staffed by certified cardiographic technicians, who are overseen by a medical director who reviews the accuracy of the data we curate and from which we prepare reports. The existence of an IDTF allows us to bill a government payor for the Zio service through one or more MACs, such as Novitas Solutions, Noridian Healthcare Solutions and Palmetto GBA. MACs are companies that operate on behalf of the federal government to process Medicare claims for reimbursement and allow us to obtain reimbursement for our Zio service at CMS defined rates. Certification as an IDTF requires that we follow strict regulations governing how the center operates, such as requirements regarding the experience and certifications of the certified cardiographic technicians. In addition, many commercial payors require our IDTFs to maintain accreditation and certification with the Joint Commission of American Hospitals. To do so we must demonstrate a specified quality standard and are subject to routine inspection and audits. These rules and regulations vary from location to location and are subject to change. If they change, we may have to change the operating procedures at our IDTFs, which could increase our costs significantly. If we fail to obtain and maintain IDTF certification, our Zio service may no longer be reimbursed by CMS and some commercial payors, which would have a material adverse impact on our business.

During the first quarter of 2022, we recognized approximately six percent of our revenue from non-contracted third-party payors, and as a result, our quarterly operating results are difficult to predict.

We have limited visibility as to when we will receive payment for our Zio service with non-contracted payors and we or XIFIN must appeal any negative payment decisions, which often delay collections further. Additionally, a portion of the revenue from non-contracted payors is received from patient co-pays, which we may not receive for several months following delivery of service or at all. For revenue related to non-contracted payors, we estimate an average collection rate based on factors including historical cash collections. Subsequent adjustments, if applicable, are recorded as an adjustment to revenue. Fluctuations in revenue may make it difficult for us, research analysts and investors to accurately forecast our revenue and operating results or to assess our actual performance. If our revenue or operating results fall below expectations, the price of our common stock would likely decline.

~~We rely on a third-party billing company, XIFIN, to transmit and pursue claims with payors. A delay in transmitting or pursuing claims could have an adverse effect on our revenue.~~

While we manage the overall processing of claims, we rely on XIFIN to transmit substantially all of our claims to payors, and pursue most claim denials. If claims for our Zio service are not submitted to payors on a timely basis, not properly adjudicated upon a denial, or if we are required to switch to a different claims processor, we may experience delays in our ability to process receipt of payments from payors, which would have an adverse effect on our revenue and our business.

The market for ambulatory cardiac monitoring solutions is highly competitive. If our competitors are able to develop or market monitoring products and services that are more effective, or gain greater acceptance in the marketplace, than any products and services we develop, our commercial opportunities will be reduced or eliminated.

The market for ambulatory cardiac monitoring products and services is evolving rapidly and becoming increasingly competitive. Our Zio service competes with a variety of products and services that provide alternatives for ambulatory cardiac monitoring, including Holter monitors and mobile cardiac telemetry monitors. Our industry is highly fragmented and characterized by a small number of large manufacturers and a large number of smaller regional service providers. These third parties compete with us in marketing to payors and prescribing physicians, recruiting and retaining qualified personnel, acquiring technology and developing products and services that compete with the Zio service. Our ability to compete effectively depends on our ability to distinguish our company and the Zio service from our competitors and their products, and includes such factors as:

•~~safety and efficacy;~~

•~~acute and long term outcomes;~~

•~~ease of use;~~

•~~price;~~

•~~physician, hospital and clinic acceptance; and~~

•~~third-party reimbursement.~~

~~Our industry is subject~~Failure to ~~rapid change and significantly affected by new product introductions, results~~receive the Zio System patches used for the provision of ~~clinical research, corporate combinations and other factors. Large competitors~~the Zio Services we provide may result in the ambulatory cardiac market include companies that sell standard Holter monitors including GE Healthcare, Philips Healthcare, Mortara Instrument, Inc., Spacelabs Healthcare Inc. and Welch Allyn Holdings, Inc., (acquired by Hill-Rom Holdings, Inc.). Additional competitors, such as BioTelemetry, Inc. (acquired by Royal Philips), Preventice Solutions, Inc., (acquired by Boston Scientific, Inc.) and Bardy Diagnostics, Inc., (acquired by Hill-Rom Holdings, Inc. which was recently acquired by Baxter International, Inc.) offer ambulatory cardiac monitoring services and also function as service providers. These companies have also developed other patch-based cardiac monitors that have received FDA and foreign regulatory clearances. There are also several small start-up companies trying to compete in the patch-based cardiac monitoring space,a loss of capital as well as ~~several entering~~revenue where the ~~patch-based cardiac monitoring market. Large medical device companies may continue~~receipt of returned devices and processing of data retrieved from returned devices is required to ~~acquire~~provide our Zio Services.

Our Zio System patches and gateways are provided to patients either (1) during in-office visits with a healthcare provider or ~~form alliances with these smaller companies~~(2) remotely via at-home hookup. Although in ~~order to diversify their product offering and participate in the digital health space.~~

We have seen a trend in the market for large medical device companies to acquire, invest in or form alliances with these smaller companies in order to diversify their product offerings and participate in the digital health space. Future competition could come from makers of wearable fitness products or large information technology companies focused on improving healthcare. For example, Apple Inc. has added capabilities on its watch platform to measure non-continuous ECG and to alert users toboth scenarios there is the potential ~~presence~~that a patient will not return the device(s) at the conclusion of irregular heartbeats suggestive of asymptomatic AF. These competitors and potential competitors may introduce new products and services that more directly compete with our Zio service. Recently, there has been increased acquisition activity and consolidation in our industry. Many of our competitors and potential competitors have significantly greater financial and other resources than we do and have well-established reputations, broader product offerings, and worldwide distribution channels that are significantly larger and more effective than ours. If our competitors and potential competitors are better able to develop new ambulatory cardiac monitoring solutions than us, or develop more effective or less expensive cardiac monitoring solutions, they may render our current Zio service obsolete or non-competitive. Competitors may also be able to deploy larger or more effective sales and marketing resources than we currently have. Competition with these companies couldthe wear period, home hookups result in ~~price cutting, reduced profit margins and loss of market share, any of~~a higher likelihood that the patient will fail to return his or her device, which ~~would harm~~negatively impacts our ~~business,~~ financial condition ~~and results of operations.~~

~~Our ability to compete depends on our ability to innovate successfully.~~

The market for medical devices, including the ambulatory cardiac monitoring segment, is competitive, dynamic, and marked by rapid and substantial technological development and product innovation. While there are barriers that would challenge new entrants or existing competitors from developing products that compete directly with ours, these barriers can be overcome. Demand for the Zio service and future related products or services could be diminished by equivalent or superior products and technologies offered by competitors. Ifwhen we are unable to ~~innovate successfully, our products and services could become obsolete and our revenue would decline as our customers purchase our competitors’ products and services.~~

~~In order~~provide the Zio Services. For example, when the patient returns the Zio XT patch to ~~remain competitive,~~us at the end of the patient wear period, we ~~must continue to develop new product offerings and enhancements~~provide the Zio XT Services, which include the end of service report based on the data stored on the Zio XT patch, after which we submit a claim to the ~~Zio service. We can provide no assurance that we will be successful in fully recognizing the strategic value of our ECG database, expanding the indications for our Zio service, developing new products~~relevant payor or commercializing them in ways that achieve market acceptance. In addition, if we develop new products, sales of those products may reduce revenue generated from our existing products. Maintaining adequate research and development personnel and resources to meet the demands of the market is essential. If we are unable to develop new products, applications or features or improve our algorithms due to constraints, such as insufficient cash resources, high employee turnover, inability to hire personnel with sufficient technical skills or a lack of other research and development resources, we may not be able to maintain our competitive position compared to other companies. Furthermore, many of our competitors devote a considerably greater amount of funds to their research and development programs than we do, and those that do not may be acquired by larger companies that would allocate greater resources to research and development programs. Our failure or inability to devote adequate research and development resources or compete effectively with the research and development programs of our competitors could harm our business.

~~We have entered into a development agreement with a third party that may not result in the development of commercially viable products or the generation of significant future revenues.~~

We have entered into a development agreement with Verily Life Sciences LLC (an Alphabet Company, referred to as “Verily”) to develop certain next-generation AF screening, detection, or monitoring products, which involve combining Verily and our technology platforms and capabilities (the “Development Agreement”). As part of the Development Agreement, we paid Verily an up-front fee of $5.0 million in cash, and $4.0 million in milestone payments during the year ended December 31, 2020 with an additional $4.0 million in milestone payments made in January of 2021. Through March 31, 2022, we have achieved milestones and related payment obligations totaling $11.0 million. We have agreed to make additional payments over the term of the Development Agreement up to an aggregate of $1.75 million, subject to the achievement of certain development and regulatory milestones. The success of our collaboration with Verily is highly dependent on the efforts provided to the collaboration by Verily and us and the skill sets of our respective employees. Support of these development efforts requires significant resources, including research and development, manufacturing, quality assurance, and clinical and regulatory personnel. Even if our development and clinical trial efforts succeed, the FDA may not clear the developed products or may require additional product testing and clinical trials before clearing the developed products, which would result in product launch delays and additional expense. If cleared by the FDA, the developed products may not be accepted in the marketplace, and there is no assurance that adequate reimbursement will be available, or that an alternative payment model can be developed.

After the initial term and scope of the Development Agreement, and in order to commercialize any developed products with Verily, we will need to enter into a commercialization agreement. There is no guarantee that we will be able to enter into such an agreement on commercially reasonable terms or at all. If we are unable to reach agreement with Verily on terms, the up-front fee and regulatory and development milestone payments and our internal development costs would not be recovered and the licenses to use Verily’s technology will expire.

This collaboration may not result in the development of products that achieve commercial success and could be terminated prior to developing any products. In the event of any termination or expiration of the Development Agreement, we may be required to devote additional resources to product development and we may face increased competition, including from Verily. Verily may use the experience and insights it develops in the course of the collaboration with us to initiate or accelerate their development of products that compete with our products, which may create competitive disadvantages for us. Accordingly, we cannot provide assurance that our collaboration with Verily or any other third party will result in the successful development of commercially viable products or result in significant additional future revenues for our company.

~~The continuing clinical acceptance of the Zio service depends upon maintaining strong working relationships with physicians.~~

The development, marketing, and sale of the Zio service depends upon our ability to maintain strong working relationships with physicians and other key opinion leaders. We rely on these professionals’ knowledge and experiencepatient for the development, marketing and sale of our products. Among other things, physicians assist us in clinical trials and product development matters and provide public presentations at trade conferences regarding the Zio service.services rendered. If a patient fails to return a device, we ~~cannot maintain our strong working relationships with these professionals and continue to receive their advice and input, the development and marketing of the Zio service could suffer,~~experience financial losses, which ~~could harm our business, financial condition and results of operations.~~

The medical device industry’s relationship with physicians is under increasing scrutiny by the Health and Human Services Office of the Inspector General, (“OIG”), the Department of Justice (“DOJ”), state attorneys general, and other foreign and domestic government agencies. Our failure to comply with laws, rules and regulations governing our relationships with physicians, or an investigation into our compliance by the OIG, DOJ, state attorneys general or other government agencies, could significantly harm our business.

~~We have a significant amount of debt, which may affect our ability to operate our business and secure additional financing in the future.~~

As of March 31, 2022, we had $34.9 million outstanding under our term loan provided by of our loan agreement with Silicon Valley Bank (“SVB”). We must make significant annual debt payments under the loan agreement which will divert resources from other activities. Our debt with SVB is collateralized by substantially all of our assets and contains customary financial and operating covenants limiting our ability to, among other things, dispose of assets, undergo a change in control, merge or consolidate, enter into certain transactions with affiliates, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. The covenants in the loan agreement, as well as in any future financing agreements into which we may enter, may restrict our ability to finance our operations and engage in, expand

or otherwise pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control and future breaches of any of these covenants could result in a default under the loan agreement. If not waived, future defaults could cause all of the outstanding indebtedness under the loan agreement to become immediately due and payable and terminate commitments to extend further credit. If we do not have or are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our ability to operate and continue our business as a going concern.

We are also exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates. Our policy is to manage interest costs using the mix of fixed- and floating-rate debt, which we cannot guarantee will mitigate the risk of interest rate fluctuation.

We may experience inflationary pressures, caused by the COVID-19 pandemic or as a result of general macroeconomic factors, which could increase our manufacturing costs and operating expenses and have a material adverse impact on our results of operations.

We continuously monitor the effects of inflationary factors, such as increases in our cost of goods sold and selling and operating expenses, which may adversely affect our results of operations. Specifically, we may experience inflationary pressure affectinginclude the cost of the components for our Zio service and in the wages that we pay our employees due to challenging labor market conditions. Competitive and regulatory conditions may restrict our ability to fully recover these costs through price increases. As a result, it may be difficult to fully offset the impact of persistent inflation. Our inability or failure to do so could have a material adverse effect on our business, financial condition and results of operations or cause us to need to obtain additional capital in future earlier than anticipated.

~~We have recently experienced management turnover, which creates uncertainties and could harm our business.~~

~~We have recently experienced significant changes in our executive leadership. In September 2021, we announced the appointment of Quentin S. Blackford,~~device as our President and Chief Executive Officer, effective October 4, 2021. In June 2021, our former Chief Executive Officer, Michael J. Coyle, announced he was resigning and our Chief Financial Officer, Douglas J. Devine, assumed the position of Interim Chief Executive Officer. In December 2020, our prior Chief Executive Officer, Kevin M. King, announced his retirementwell as our Chief Executive Officer. In June 2020, our Chief Financial Officer, Matthew C. Garrett, announced that he was resigning for personal reasons and in March 2020, our Chief Operating Officer, Karim Karti, resigned.

Changes to strategic or operating goals, which can often times occur with the appointment of new executives, can create uncertainty, may negatively impact our ability to execute quickly and effectively, and may ultimately be unsuccessful. In addition, executive leadership transition periods are often difficult as the new executives gain detailed knowledge of our operations, and friction can result from changes in strategy and management style. Management turnover inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution. If we do not integrate new executives successfully, we may be unable to manage and grow our business, and our financial condition and profitability may suffer as a result. In addition, to the extent we experience additional management turnover, competition for top management is high and it may take months to find a candidate that meets our requirements. If we are unable to attract and retain qualified management personnel, our business could suffer.

~~We depend on our senior management team and~~ the loss of ~~one or more key employees or an inability to attract and retain highly skilled employees could harm our business.~~potential revenue for the service that is contingent on the returned device for the submission of the associated claim.

Our ~~success depends largely~~plans include a high degree of focus on the ~~continued services~~mSToPs criteria for Afib screening. There are risks that the clinical or payor community will not fully accept these criteria as a basis for selection of ~~key members~~patients suitable for screening.

In January 2022, the USPSTF published a recommendation statement on the screening criteria for Afib screening, stating that the current evidence (including the mSToPs study) is insufficient to assess the balance of ~~our executive management team~~benefits and ~~others in key management positions. For~~harm of Afib screening, and thus found that it could neither recommend for or against screening of adults 50 years or older without a diagnosis or symptoms of Afib and without a history of transient ischemic attack or stroke. In its recommendation, the USPSTF also identified research needs and gaps, including for example assurance that future research involves randomized trials of diverse patient populations and conducting research to optimize the ~~services~~accuracy of ~~Quentin S. Blackford, our President~~screening for Afib. This USPTSF recommendation statement may deter some clinicians or payors from accepting the mSToPs study inclusion and ~~Chief Executive Officer, and Douglas J. Devine, our Chief Financial Officer and Chief Operating Officer, are essential to formulating and executing~~exclusion criteria as a standard for selecting patients for screening for Afib. We cannot predict whether or when the USPSTF’s recommendation on ~~corporate strategy and to ensuring~~Afib screening will change or be modified based on findings from additional randomized trials, other research or through the continued operations and integrity of financial reporting within our company. In addition, the services provided by David A. Vort, our Chief Commercial Officer, are critical to the growth that we have experienced in the sales of our Zio service. The services of Patrick Murphy, our Chief Legal Counsel, are critical for managing our legal and compliance functions. The services of Mark Day, our Chief Technology Officer are critical for managing our research and development programs. Our employees may terminate their employment with us at any time. If we lose one or more key employees, we may experience difficulties in competing effectively, developing our technologies and implementing our business strategy. We do not currently maintain key person life insurance policies on these or any of our employees.

In addition, our research and development programs and clinical operations depend on our ability to attract and retain highly skilled engineers and certified cardiographic technicians. We may not be able to attract or retain qualified engineers and

certified cardiographic technicians in the future due to the competition for qualified personnel. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than us. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached legal obligations, resulting in a diversion of our time and resources and, potentially, damages. In addition, job candidates and existing employees, particularly in the San Francisco Bay Area, often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock awards declines, it may harm our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects would be harmed.

~~International expansion of our business exposes us to market, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.~~

~~Our business strategy includes international expansion. Doing business internationally involves a number of risks, including:~~

•multiple, conflicting and changing laws and regulations such as tax laws, privacy laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses;

•~~obtaining and sustaining regulatory approvals, certifications, and regulatory compliance where required for the sale~~use of our products and services ~~in various countries;~~or other similarly situated products and services designed for remote cardiac monitoring.

•~~requirements to maintain data and the processing of that data on servers located within such countries;~~

•~~complexities~~We may face risks associated with ~~managing multiple payor reimbursement regimes, government payors or patient self-pay systems;~~

•~~logistics~~acquisitions of companies, products, and ~~regulations associated with shipping~~technologies and ~~returning~~ our ~~Zio monitors following use;~~

•~~limits on our ability to penetrate international markets~~business could be harmed if we are ~~required~~unable to ~~process~~address these risks.

If we are presented with appropriate opportunities, we could acquire or make other investments in complementary companies, products, or technologies. We may not realize the ~~Zio service locally;~~

•~~financial~~anticipated benefit of our acquisitions, or the realization of the anticipated benefits may require greater expenditures than anticipated by us. We will likely face risks, ~~such as longer payment cycles, difficulty collecting accounts receivable, the effect of local~~uncertainties, and ~~regional financial pressures on demand and payment for our products and services and exposure to foreign currency exchange rate fluctuations;~~

•~~natural disasters, political and economic instability, including wars, terrorism, political unrest, outbreak of disease, boycotts, curtailment of trade and other market restrictions;~~

•regulatory and compliance risks that relate to maintaining accurate information and control over activities subject to regulation under the United States Foreign Corrupt Practices Act of 1977 (“FCPA”), U.K. Bribery Act of 2010 and comparable laws and regulations in other countries; and

•~~compliance risks~~disruptions associated with the ~~General Data Protection Regulation (“GDPR”) (including as it applies~~integration process, including difficulties in the ~~United Kingdom by virtue~~integration of the Data Protection Act 2018), enacted to protect the privacy of all individuals in the European Union and the United Kingdom, and places certain restrictions on the export of personally identifiable data outside of the European Union or the United Kingdom, as applicable.

~~Any of these factors could significantly harm our future international expansion and~~ operations and ~~consequently,~~services of any acquired company, integration of acquired technology with our ~~revenue and results of operations.~~

~~Our relationships with business partners in new international markets may subject us to an increased risk of litigation.~~

~~As we expand~~Zio Services, including our business internationally, if we cannot successfully manage the unique challenges presented by international markets and our relationships with new business partners within those markets, our expansion activities may be adversely affected and we may become subject to an increased risk of litigation.

We may become involved in disputes relating to our products, contracts and business relationships. Such disputes include litigation against persons whom we believe have infringed on our intellectual property, infringement litigation filed against us, litigation against a competitor or litigation filed against us by distributors or service providers resulting from a breach of contract or other claim. Any of these disputes may result in substantial costs to us, judgments, settlements andZio Systems, diversion of our management’s attention ~~which could adversely affect~~from other business concerns, the potential loss of key employees or suppliers of the acquired businesses, and impairment charges if future acquisitions are not as successful as we originally anticipated. If we fail to successfully integrate other companies, products or technologies that we acquire, our business ~~financial condition or operating results. There is also a risk of adverse judgments, as the outcome of litigation in foreign jurisdictions can be inherently uncertain.~~

We could be ~~adversely affected by violations of the FCPA, and similar worldwide anti-bribery laws which could have a material adverse effect on our business.~~

The FCPA and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from corruptly providing any benefits to government officials for the purpose of obtaining or retaining business. We are in the process of designing and implementing policies and procedures intended to help ensure compliance with these laws. In the future,harmed. Furthermore, we may ~~operate in parts of~~have to incur debt or issue equity or equity-linked securities to pay for any future acquisitions or investments, the world that have experienced governmental corruption to some degree. We cannot assure you that our internal control policies and procedures will protect us from improper acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and have a material adverse effect on our business and operations.

In addition, the DOJ or other governmental agencies could impose a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, modifications to business practices including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA. The imposition of any of these sanctions or remedial measures could have a material adverse effect on our business and results of operations.

~~Our proprietary data analytics engine may not operate properly, which could damage our reputation, give rise to claims against us or divert application of our resources from other purposes, any~~issuance of which could ~~harm our business and operating results.~~

~~The ECG data that is gathered through our Zio monitors is curated by algorithms that are part of our Zio service and a Zio report is delivered~~be dilutive to the prescribing physician for diagnosis. The continuous development, maintenance and operation of our deep-learned backend data analytics engine is expensive and complex, and may involve unforeseen difficulties including material performance problems, undetected defects or errors. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our proprietary algorithms from operating properly. We may also attempt to develop new capabilities and incorporate new technologies, including artificial intelligence, which could impact our data analytics platform’s performance. If our data analytics platform does not function reliably or fails to meet physician or payor expectations in terms of performance, physicians may stop prescribing the Zio service and payors could attempt to cancel their contracts with us.

~~Any unforeseen difficulties we encounter in~~ our existing or new software, cloud-based applications, telecommunication service providers, and analytics services, and any failure by us to identify and address them could result in loss of revenue or market share, diversion of development resources, injury to our reputation and increased service and maintenance costs. Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating results.

~~Provision of the Zio service is dependent upon third-party vendors who are subject to disruptions, which could directly or indirectly harm our business and operating results.~~

The analysis we perform to create the diagnostic report for the Zio service is dependent upon a recording made by each device, which requires the physical return of the Zio monitor to one of our clinical centers. We predominantly rely on the U.S. Postal Service (“USPS”) to perform this delivery service. Delivery of the Zio monitor to one of our clinical centers may be subject to disruption by natural disasters such as earthquake or flooding, labor disagreements or errors on behalf of USPS staff, operational and funding reductions negatively impacting USPS service capabilities, structural issues timely processing in some geographies, or other disruption to the USPS delivery infrastructure. Further, for the Zio AT monitor, we rely on the provision of cellular communication services for the timely transmission of patient information and reportable events. Once received, all data from both Zio XT and AT monitors is processed, curated and reported on through cloud-computing resources. The reliability of these communication and cloud services is also subject to natural disasters, labor disruptions, human error, and infrastructure failure.

~~Any of these disruptions may render it difficult or temporarily impossible for us to provide some or all of the Zio service, adversely affecting~~stockholders. In addition, our operating results ~~causing significant distraction for management, and negatively impacting our business reputation.~~

~~Security breaches, loss~~may suffer because of ~~data and other disruptions could compromise sensitive information related~~acquisition-related costs, amortization expenses, or charges relating to ~~our business or patients, or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.~~

In the ordinary course of our business, we and our third-party billing and collections provider, XIFIN, collect, process, and store sensitive data, including legally-protected personally identifiable health information about patients in the United States and in the United Kingdom. This personally identifiable information may include, among other information, names, addresses, phone numbers, email addresses, insurance account information, age, gender, and heart rhythm data. We also process and store, and use additional third parties to process and store, sensitive intellectual property and other proprietary business information, including that of our customers, payors and collaborative partners. We manage and maintain our applications and data utilizing a combination of on-site systems, managed data center systems and cloud-based computing center systems. These applications and data encompass a wide variety of business critical information, including research and development information, commercial information and business and financial information.acquired intangible assets.

We are highly dependent on information technology networks and systems, including the internet and services hosted by Amazon Web Services and other third party service providers, to securely process, transmit and store this critical information. Security breaches of this infrastructure, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns, or unauthorized disclosure or modifications of confidential information involving patient health information to become publicly available. The secure processing, storage, maintenance and transmission of this critical information are vital to our operations and business strategy, and we devote significant resources to protecting such information, including executing Business Associates Agreements (HIPAA) and Data Processing Agreements (UK GDPR) with applicable vendors. Although we take measures to protect sensitive information from unauthorized access or disclosure, cyber-attacks are becoming more sophisticated and frequent, and our information technology and infrastructure, and that of XIFIN and other third parties we utilize to process or store data, may be vulnerable to viruses and worms, phishing attacks, denial-of-service attacks, physical or electronic break-ins, attacks by hackers, breaches due to employee error, malfeasance, or misuse, or similar disruptions from unauthorized tampering. We have in the past been subject to cyber-attacks and data breaches and expect that we will be subject to additional cyber-attacks in the future and may experience future data breaches. While we have implemented data privacy and security measures that we believe are compliant with applicable privacy laws and regulations, some confidential and protected health information, is transmitted to us by third parties, who may not implement adequate security and privacy measures. Further, if third party service providers that process or store data on our behalf experience security breaches or violate applicable laws, agreements, or our policies, such events may also put our information at risk and could in turn have an adverse effect on our business.

A security breach or privacy violation that leads to disclosure or modification of, or prevents access to, patient information, including protected health information, could harm our reputation, compel us to comply with disparate state breach notification laws, require us to verify the correctness of database contents and otherwise subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. If we are unable to prevent such security breaches or privacy violations or implement satisfactory remedial measures in a timely manner, the market perception of the effectiveness of our security measures could be harmed, our operations could be disrupted, our brand could be adversely affected, demand for our products and services may decrease, we may be unable to provide the Zio service, we may lose sales and customers, and we may suffer loss of reputation, financial loss and other regulatory penalties because of lost or misappropriated information, including sensitive patient data. We may be required to expend significant capital and financial resources to invest in security measures, protect against such threats or to alleviate problems caused by breaches in security. In addition, these breaches and other inappropriate or unauthorized access can be difficult to detect, and any delay in identifying them may lead to increased harm to individuals. Although we have invested in our systems and the protection of our data to reduce the risk of an intrusion or interruption, and we monitor our systems on an ongoing basis for any current or potential threats, we can give no assurances that these measures and efforts will prevent all intrusions, interruptions, or breakdowns.

Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched, we may be unable to anticipate these techniques or to implement adequate preventive measures.

In the event that patients or physicians authorize or enable third parties to access their data on our systems, we cannot ensure the complete integrity or security of such data in our systems as we would not control that access. Third parties may also attempt to fraudulently induce our employees, or patients or physicians who use our technology, into disclosing sensitive information such as user names, passwords or other information. Third parties may also otherwise compromise our security measures in order to gain unauthorized access to the information we store. This could result in significant legal and financial exposure, a loss in confidence in the security of our service, interruptions or malfunctions in our service, and, ultimately, harm to our future business prospects and revenue.

Any such breach or interruption of our systems, or those of XIFIN or any of our third party information technology partners, could compromise our networks or data security processes and sensitive information could be inaccessible or could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Any such interruption in access, improper access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of patient information, such as the federal Health Insurance Portability and Accountability Act of 1996, or ("HIPAA"), the General Data Protection Regulation, and the UK Data Protection Act 2018. Regardless of the merits of any such claim or proceeding, defending it could be costly and divert management’s attention from leading our business. Unauthorized access, loss or dissemination could also disrupt our operations, including our ability to perform our services, bill payors or patients, process claims and appeals, provide customer assistance services, conduct research and development activities, collect, process and prepare company financial information, provide information about our current and future solutions and engage in other patient and clinician education and outreach efforts. Any such breach could also result in the compromise of our trade secrets and other proprietary information, which could adversely affect our business and competitive position.

Depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to or acquisition of our customer, employee and patient data, we may also have obligations to notify users about the incident and we may need to provide some form of remedy for the individuals affected by the incident. A growing number of legislative and regulatory bodies have adopted consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal data. Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises personal data within our control (such as that of customers, patients and employees). In addition, the interpretation and application of consumer, health-related and data protection laws, rules and regulations in the United States, the UK, European Union and elsewhere are often uncertain, contradictory and in flux. It is possible that these laws, rules and regulations may be interpreted and applied in a manner that is inconsistent with our practices or those of our distributors and partners. If we or these third parties are found to have violated such laws, rules or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business. In addition, California has enacted the California Consumer Privacy Act (“CCPA”), which became effective on January 1, 2020, and requires, among other things, disclosures to California consumers and afford such consumers abilities to opt out of certain sales of their personal information by us. It remains unclear how various provisions of the CCPA will be interpreted and enforced. The effects of the CCPA are potentially significant and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply with this legislation.

~~The use, misuse or off-label use of the Zio service may result in injuries that lead to product liability suits, which could be costly to our business.~~

The use, misuse or off-label use of the Zio service may in the future result in outcomes and complications potentially leading to product liability claims. For example, we are aware that physicians have prescribed the Zio service off-label for pediatric patients. We have also received and may in the future receive product liability or other claims with respect to the Zio service, including claims related to skin irritation and alleged burns. In addition, if the Zio monitor is defectively designed, manufactured or labeled, contains defective components or is misused, we may become subject to costly litigation initiated by physicians, or the hospitals and clinics where physicians prescribing our Zio service work, or their patients. Product liability claims are especially prevalent in the medical device industry and could harm our reputation, divert management’s attention from our core business, be expensive to defend and may result in sizable damage awards against us.

Although we maintain product liability insurance, we may not have sufficient insurance coverage for future product liability claims. We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, harm our reputation, significantly increase our expenses, and reduce product sales. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, harming our financial condition and operating results.

~~Our forecasts of market growth may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business may not increase at similar rates, if at all.~~

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Our forecasts relating to, among other things, the expected growth in the ambulatory cardiac monitoring solutions market may prove to be inaccurate.

Our growth is subject to many factors, including whether the market for first-line ambulatory cardiac monitoring solutions continues to improve, the rate of market acceptance of the Zio service as compared to the products of our competitors and our success in implementing our business strategies, each of which is subject to many risks and uncertainties. If our Zio service works as anticipated to provide a correct first-line diagnosis, it may lead to a decrease in the amount of ambulatory cardiac monitoring prescriptions each year in the United States. This outcome would result if our Zio service is proven to produce the right diagnosis the first time, thereby reducing the need for additional testing. Accordingly, our forecasts of market opportunity should not be taken as indicative of our future growth.

We may acquire other companies or technologies, or enter into joint ventures or other strategic alliances, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our operating results.

We may in the future seek to acquire or invest in businesses, applications or technologies that we believe could complement or expand our ambulatory cardiac monitoring solutions portfolio, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various costs and expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. We may not be able to identify desirable acquisition targets or be successful in entering into an agreement with any particular target or obtain the expected benefits of any acquisition or investment. In addition, any of these transactions could be material to our financial condition and operating results and expose us to many risks, including:

•~~disruption in our relationships with existing strategic partners or suppliers as a result of such a transaction;~~

•~~unanticipated liabilities related to acquired companies;~~

•~~difficulties integrating acquired personnel, technologies and operations into our existing business;~~

•~~retention of key employees;~~

•~~diversion of management time and focus from operating our business to management of strategic alliances or joint ventures or acquisition integration challenges;~~

•~~increases in our expenses and reductions in our cash available for operations and other uses;~~

•~~possible write-offs or impairment charges relating to acquired businesses; and~~

•~~possible compliance, regulatory, or product issues.~~

To date, the growth of our operations has been largely organic, and we have limited experience in acquiring other businesses or technologies or entering into joint ventures or strategic alliances. Acquisitions, joint ventures or strategic alliances could also result in dilutive issuances of equity securities, the use of our available cash, or the incurrence of debt, which could harm our operating results. In addition, if an acquired business, joint venture or strategic alliance fails to materialize or fails to meet our expectations, our operating results, business and financial condition may suffer.

~~Consolidation of commercial payors could result in payors eliminating coverage or reducing reimbursement rates for our Zio service.~~

When payors combine their operations, the combined company may elect to reimburse our Zio service at the lowest rate paid by any of the participants in the consolidation or use its increased size to negotiate reduced rates. If one of the payors participating in the consolidation does not reimburse for the Zio service at all, the combined company may elect not to reimburse for the Zio service, which would adversely impact our operating results. While attempts by Aetna Inc. to acquire Humana Inc. and Anthem Inc. to acquire Cigna Corp. have been largely abandoned due to antitrust challenges by the DOJ, it is possible that these or other payor consolidations may occur in the future.

~~Our ability to utilize our net operating loss carryovers may be limited.~~

As of December 31, 2021, we had federal and state net operating loss carryforwards (“NOLs”) of $464.3 million and $279.1 million, respectively, which if not utilized will begin to expire in 2027 for federal purposes and have begun expiring for state purposes. We may use these NOLs to offset against taxable income for U.S. federal and state income tax purposes. However, Section 382 of the Internal Revenue Code, as amended, may limit the NOLs we may use in any year for U.S. federal income tax purposes in the event of certain changes in ownership of our company. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of a company’s stock increase their ownership by more than 50 percentage points (by value) over their lowest ownership percentage within a rolling three year period. Similar rules may apply under state tax laws. Future issuances or sales of our stock, including certain transactions involving our stock that are outside of our control, could cause an “ownership change.” If an “ownership change” has occurred in the past or occurs in the future, Section 382 would impose an annual limit on the amount of pre-ownership change NOLs and other tax attributes we can use to reduce our taxable income, potentially increasing and accelerating our liability for income taxes, and also potentially causing those tax attributes to expire unused. Any limitation on using NOLs could, depending on the extent of such limitation and the NOLs previously used, result in our retaining less cash after payment of U.S. federal and state income taxes during any year in which we have taxable income, rather than losses, than we would be entitled to retain if such NOLs were available as an offset against such income for U.S. federal and state income tax reporting purposes, which could adversely impact our operating results.

~~We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.~~

We are responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act. As disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022, we identified a material weakness in our internal control over financial reporting. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, we concluded that our internal control over financial reporting was not effective based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-An Integrated Framework (2013).

To implement remedial measures as disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022, we committed additional resources, hired additional staff, and provided additional management oversight. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results. In addition, if we are unable to successfully remediate the material weakness that continues to exist and if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected.

~~Risks Related to Our Intellectual Property~~

~~We may become a party to intellectual property litigation or administrative proceedings that could be costly and could interfere with our ability to provide the Zio service.~~

The medical device industry has been characterized by extensive litigation regarding patents, trademarks, trade secrets, and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. It is possible that U.S. and foreign patents and pending patent applications or trademarks controlled by third parties, especially those held by our competitors, may be alleged to cover our products or services, or that we may be accused of misappropriating third parties’ trade secrets. Additionally, our products include hardware and software components that we purchase from vendors, and may include design components that are outside of our direct control. Our competitors, many of which have substantially greater resources and have made substantial investments in patent portfolios, trade secrets, trademarks, and competing technologies, may have applied for or obtained, or may in the future apply for or obtain, patents or trademarks that will prevent, limit or otherwise interfere with our ability to make, use, sell and/or export our products and services or to use product names. Moreover, in recent years, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls,” have purchased patents or otherwise obtained rights to other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. From time to time, we may receive threatening letters, notices or “invitations to license,” or may be the subject of claims that our products and business operations infringe or violate the intellectual property rights of others. The defense of these matters can be time-consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand, and cause us to incur significant expenses or make

substantial payments to satisfy judgments or settle claims. Vendors from which we purchase hardware or software may not indemnify or defend us in the event that such hardware or software is accused of infringing a third-party’s patent or trademark or of misappropriating a third-party’s trade secrets.

Further, if such patents, trademarks, or trade secrets are successfully asserted against us, this may harm our business and result in injunctions preventing us from selling our products, license fees, damages and the payment of attorney’s fees and court costs. In addition, if we are found to have willfully infringed third-party patents or trademarks or to have misappropriated trade secrets, we could be required to pay treble damages in addition to other penalties. Although patent, trademark, trade secret, and other intellectual property disputes in the medical device and services area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if at all. If we do not obtain necessary licenses, we may not be able to redesign our Zio monitors or our Zio service to avoid infringement and our product development efforts may be negatively affected as a result.

Similarly, interference or derivation proceedings provoked by third parties or brought by the U.S. Patent and Trademark Office (“USPTO”) may be necessary to determine priority with respect to our patents, patent applications, trademarks or trademark applications. We may also become involved in other proceedings, such as reexamination, inter partes review, derivation or opposition proceedings before the USPTO or other jurisdictional body relating to our intellectual property rights or the intellectual property rights of others. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing the Zio monitors and selling the Zio service or using product names, which would have a significant adverse impact on our business.

Additionally, we may need to commence proceedings against others to enforce our patents or trademarks, to protect our trade secrets or know how, or to determine the enforceability, scope and validity of the proprietary rights of others. These proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel. We may not prevail in any lawsuits that we initiate, a scenario that could also result in the invalidation of our asserted patents, and the damages or other remedies awarded, if any, may not be commercially meaningful. We may not be able to stop a competitor from marketing and selling products that are the same or similar to our products and services or from using product or service names that are the same or similar to ours, and our business may be harmed as a result.

We use certain open source software in the infrastructure supporting the Zio service. Licensees of open source software may be required to make public and use certain source code, to license proprietary software for free or to make certain derivative works available to others. As a result, we may face claims from companies that incorporate open source software into their products or from open source licensors, claiming ownership of, or demanding release of, the source code, the open source software or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to cease offering the Zio service unless and until we can re-engineer it to avoid infringement. This re-engineering process could require significant additional research and development resources, and we may not be able to complete it successfully. While we monitor and control the use of open source software in the Zio service and in any third party software that is incorporated into the Zio service, and we try to ensure that no open source software is used in such a way as to require us to disclose the source code underlying the Zio service, there can be no guarantee that such use could not inadvertently occur. These risks could be difficult to eliminate or manage, and, if not addressed, could harm our business, intellectual property protection, financial condition and operating results.

~~Intellectual property rights may not provide adequate protection, which may permit third parties to compete against us more effectively.~~

In order to remain competitive, we must develop and maintain protection of the proprietary aspects of our technologies. We rely on a combination of patents, copyrights, trademarks, trade secret laws and confidentiality and invention assignment agreements with employees and third parties to protect our intellectual property rights. As of December 31, 2021, we owned, or retained exclusive license to, twenty-three issued U.S. patents, the earliest of which will expire in 2028. As of December 31, 2021, we also owned, or retained an exclusive license to, eight issued patents from the Japanese Patent Office, two issued patents from the Australian Patent Office, four issued patents from the Canadian Patent Office, five issued patents from the European Patent Office, three issued patents from the Korean Patent Office, and one issued patent from the Chinese Patent Office. The earliest expiration date of these international patents is 2027. As of December 31, 2021, we had twenty-six pending patent applications globally, including twelve in the United States, three in the European Patent Office, four in Japan, three Patent Cooperation Treaty (“PCT”) international applications, and one in each of Australia, Korea, China and India. Our patents and patent applications are directed to covering key aspects of the design, manufacture and use of the Zio monitor and the Zio service.

We rely, in part, on our ability to obtain and maintain patent protection for our proprietary products and processes. The process of applying for and obtaining a patent is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost, in a timely manner, or in all jurisdictions where protection may be commercially advantageous, or we may not be able to protect our proprietary rights at all. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary. In addition, the issuance of a patent does not ensure that it is valid or enforceable, so even if we obtain patents, they may not be valid or enforceable against third parties. Our patent applications may not result in issued patents and our patents may not be sufficiently broad to protect our technology. Issued international patents may carry a requirement to “work” a patent in the applicable geography; failure to do so could lead to loss of the patent or the requirement to accept licensing terms, both of which would be favorable to our competitors. Furthermore, the issuance of a patent does not give us the right to practice the patented invention. Third parties may have blocking patents that could prevent us from marketing our own products and practicing our own technology. Alternatively, third parties may seek approval to market their own products similar to or otherwise competitive with our products. In these circumstances, we may need to defend and/or assert our patents, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or agency with jurisdiction may find our patents invalid or unenforceable; competitors may then be able to market products and use manufacturing and analytical processes that are substantially similar to ours. Even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives. Litigation is time-consuming and expensive and would divert our resources.

~~If we are unable to protect the confidentiality of our trade secrets and other proprietary information, our business and competitive position may be harmed.~~

We rely heavily on trade secrets as well as invention assignment and confidentiality provisions that we have in contracts with our employees, consultants, collaborators and others to protect our algorithms and other aspects of our Zio service. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors or former or current employees, despite the existence generally of these confidentiality agreements and other contractual restrictions. These agreements may not provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information. There can be no assurance that employees, consultants, vendors and clients have executed such agreements or have not breached or will not breach their agreements with us, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors. Despite the protections we do place on our intellectual property, monitoring unauthorized use and disclosure of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be adequate. In addition, the laws of many foreign countries will not protect our intellectual property rights to the same extent as the laws of the United States. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could affect our ability to expand to international markets or require costly efforts to protect our technology.

We may also employ individuals who were previously or are concurrently employed at research institutions or other medical device companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former or concurrent employers, or that patents and applications we have filed to protect inventions of these employees, even those related to one or more of our products, are rightfully owned by their former or concurrent employer. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

To the extent our intellectual property protection is incomplete, we are exposed to a greater risk of direct competition. A third party could, without authorization, copy or otherwise obtain and use our products or technology, or develop similar technology. Our competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts or design around our protected technology. Our failure to secure, protect and enforce our intellectual property rights could substantially harm the value of our Zio service, brand and business. The theft or unauthorized use or publication of our trade secrets and other confidential business information could reduce the differentiation of our products and harm our business, the value of our investment in development or business acquisitions could be reduced and third parties might make claims against us related to losses of their confidential or proprietary information. Any of the foregoing could materially and adversely affect our business.

Further, it is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our trade secret rights and related confidentiality and nondisclosure provisions. If we fail to obtain or maintain trade secret protection, or if our competitors obtain our trade secrets or independently develop technology similar to ours or competing technologies, our competitive market position could be materially and adversely affected. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets, and agreement terms that address non-competition are difficult to enforce in many jurisdictions, and might not be enforceable in certain cases.

~~If our trademarks and tradenames are not adequately protected, then we may not be able to build name recognition in our markets and our business may be adversely affected.~~

We rely on trademarks, service marks, trade names and brand names, such as our registered trademark “ZIO,” to distinguish our products from the products of our competitors, and have registered or applied to register these trademarks. We cannot assure you that our trademark applications will be approved. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in proceedings before the USPTO and in proceedings before comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources towards advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks. Additionally, we are aware of at least one third party that has registered the “IRHYTHM” mark in the European Union in connection with computer software for controlling and managing patient medical information, heart rate monitors, and heart rate monitors to be worn during moderate exercise, among other uses. We and the third party are involved in adversary proceedings before the Trademark Office in the European Union, and those proceedings could impact our ability to obtain a European Union trade mark registration for the “IRHYTHM” mark, although we already own many national registrations for IRHYTHM in Europe.

~~Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future products.~~

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. In 2011, the Leahy-Smith America Invents Act (“Leahy-Smith Act”) was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also may affect patent litigation. These also include provisions that switched the United States from a “first-to-invent” system to a “first-to-file” system, allow third-party submission of prior art to the USPTO during patent prosecution and set forth additional procedures to attack the validity of a patent by the USPTO, administered post grant proceedings. Under a first-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. Under the new post grant provisions of the Leahy-Smith Act, the USPTO introduced procedures that provide additional administrative pathways for third parties to challenge issued patents. Inter partes review (“IPR”) is one of these procedures. The number of IPR challenges filed is increasing, and in many cases, the USPTO is canceling or significantly narrowing issued patent claims. Accordingly, even if a patent is granted by the USPTO, there is risk that it may not withstand an IPR challenge. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Recent case law has increased uncertainty regarding the availability of patent protection for certain technologies and the costs associated with obtaining patent protection for those technologies. For example, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In particular, the 2014 decision by the U.S. Supreme Court in ~~Alice Corp. v. CLS Bank International~~ has increased the difficulty of obtaining new software patents and enforcing existing software patents. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future.

5947

Risks Related to ~~Government Regulation~~Healthcare Regulatory Matters

~~Changes~~

Our use of third-party service providers or iRhythm company resources located outside the United States to support certain customer care, clinical and other operations of our IDTFs may present challenges, and if we are ineffective in limiting work performed by these service providers or iRhythm consistent with applicable regulations or our contractual agreements with commercial payors, we may be subject to penalties or experience loss of revenue.

Beginning in the ~~regulatory environment may constrain or require us~~third quarter of 2022, we engaged Sutherland Healthcare Solutions, Inc. and Techindia Infoway Private Limited, to ~~restructure~~support certain customer care and clinical operations of our ~~operations, which may harm~~IDTFs. We have developed operational and technical controls to limit the work performed by these vendors consistent with our ~~revenue and operating results.~~

~~Healthcare~~interpretation of the Medicare coverage exclusion for items of services furnished outside the United States, other applicable laws and regulations, ~~change frequently~~ and ~~may change significantly in the future. We may~~any requirements imposed pursuant to our contracts with commercial payors. If these controls do not ~~be able~~work as intended, or if regulators or commercial payors disagree with our interpretation of these requirements and their application to ~~adapt~~ our operations, we may be subject to ~~address every new regulation,~~a requirement to return funds already paid to us, civil monetary penalties, other government enforcement, as highlighted by a recent enforcement action against our competitor, BioTelemetry, Inc., with respect to the support of certain clinical operations by vendors performing work outside the United States, and ~~new regulations may adversely affect our business. We cannot assure you that a review~~termination of our business by courts or regulatory authorities would not result in a determination that adversely affects our revenue and operating results, or that the healthcare regulatory environment will not change in a way that restricts our operations. In addition, there is risk that the U.S. Congress may implement changes in laws and regulations governing healthcare service providers, including measures to control costs, or reductions in reimbursement levels, which may adversely affect our business and results of operations.

~~Government~~contracts with commercial payors, ~~such as CMS,~~ as well as ~~insurers,~~the loss of revenue associated with those contracts.

In addition, we are currently engaging with other third-party service providers that have ~~increased their efforts to control~~resources located outside the ~~cost, utilization~~United States, and ~~delivery of healthcare services. From time to time, the U.S. Congress has considered and implemented changes~~we are establishing iRhythm company resources in the ~~CMS fee schedules~~Philippines to provide services in ~~conjunction with budgetary legislation. Further reductions~~support our IDTFs. We intend for these services to include benefits verification, billing, collections, and customer service, which will require complex oversight and monitoring for appropriate capture and escalation of reimbursement by CMS for services or changes in policy regarding coverage of tests or other requirements for payment, such as prior authorization or a physician or qualified practitioner’s signature on test requisitions,complaint information that may be relevant to the quality, performance, and safety of our medical devices or the quality of our clinical services. If we are unable to effectively manage this oversight and monitoring, we may be subject to regulatory enforcement action or inquiries which may be expensive and time consuming to resolve. In addition, certain contracts with commercial payors include restrictions related to accessing patient data outside the United States and we have implemented technical controls intended to prohibit access to patient data by service providers and iRhythm company resources located outside the United States for these commercial payors, as appropriate. If these controls do not work as intended, or if the payor information we receive from ~~time to time. Reductions in~~ordering healthcare providers is delayed or inaccurate, we may encounter the ~~reimbursement rates and changes in payment policies~~suspension or termination of ~~other third-party~~contracts with commercial payors, ~~may occur as well. Similar changes in the past have resulted in reduced payments~~ as well as ~~added costs and~~any contractual remedies such payors might pursue. The suspension or loss of any of our key commercial payor agreements would have added more complex regulatory and administrative requirements. For example, on January 29, 2021, Novitas Solutions, a MAC that we, physicians and hospitals rely on to process Medicare reimbursement claims related to our Zio service recently published reimbursement rates that were considerably lower than those than expected. On January 10, 2022, Novitas Solutions published rates for 2022 that were retroactive to January 1, 2022 and replaced the rates that it had published in 2021. These revised rates were higher than the rates posted in 2021, but continue to be significantly below the historical Medicare rates for our Zio XT service. Further changes in federal, state, local and third-party payor regulations or policies may have a materialan adverse impact on our ~~business. Actions by agencies regulating insurance or changes in other laws, regulations, or policies may also have a material adverse effect on~~revenue and our ~~business.~~results of operations.

If we fail to comply with medical device, healthcare and other governmental regulations, we could face substantial penalties and our business, results of operations, and financial condition could be adversely affected.

The ~~products~~services and ~~services~~related devices we offer are highly regulated, and ~~there can be no assurance that~~ the regulatory environment in which we operate ~~will not~~may change significantly and adversely in the future. Our arrangements with physicians, hospitals, clinics, and ~~clinics~~other stakeholders in the healthcare industry may expose us to broadly applicable medical device laws and healthcare fraud and abuse and other laws and regulations that may restrict the financial arrangements and relationships through which we market, sell, distribute, and ~~distribute~~provide our ~~products~~services and ~~services.~~related devices. Our employees, consultants, and commercial partners and collaborators may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements. Federal and state healthcare laws and regulations that may affect our ability to conduct business, include, without limitation:

•federal and state laws and regulations regarding billing and claims ~~payment applicable to our Zio service and regulatory agencies enforcing those laws and regulations;~~payment;

•the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the ~~CMS~~Medicare and Medicaid programs;

•the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government;

•federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

•the FCPA, the ~~U.K.~~UK Bribery Act of 2010, and other local anti-corruption laws that apply to our international activities;

•the federal Physician Payment Sunshine Act, or Open Payments, ~~created under the Affordable Care Act,~~ and its implementing regulations, which requires ~~manufacturers of drugs, medical devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program~~us to report ~~annually to the U.S. Department of Health and Human Services, information related to~~ payments or other transfers of value made to licensed physicians and certain mid-level health practitioners and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;

•HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and its implementing regulations, which impose certain requirements relating to the privacy, security, and transmission of individually identifiable health information; HIPAA also created criminal liability for knowingly and willfully falsifying or concealing a material fact or making a materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

•~~The E.U. General Data Protection Regulation~~the GDPR and the ~~U.K.~~UK Data Protection Act 2018, which each provide legal requirements for the handling and disclosure (including across borders) of personal data collected in the European Union and the United Kingdom, respectively;

•the ~~federal physician self-referral prohibition, commonly known as the Stark Law;~~

•~~the~~ FDA’s Code of Federal Regulations, including but not limited to, 21 CFR Parts 820, 803, 806, and 801, that outlines requirements for medical device design, testing, marketing authorization, manufacturing, labeling, distribution, and post-market surveillance requirements;

•the ~~European Union’s Medical Device Directives~~EU MDD and ~~Medical Device Regulations (“~~EU ~~MDR”)~~MDR that outline requirements for medical device CE marking;

•the ~~United Kingdom’s Medical Device Regulations~~UK MDR, which, post the United Kingdom’s withdrawal from the European Union, replaces the CE marking requirement for medical devices sold in the United Kingdom with a ~~UK Conformity Assessment (UKCA)~~UKCA mark; and

•state law equivalents of each of the above U.S. federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state and foreign laws governing the privacy and security of ~~health~~individually identifiable information in certain circumstances (e.g., the Telephone Consumer Protection Act, the CAN-SPAM Act, and state privacy, consumer protection, and breach notification laws), many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

~~The Affordable Care Act was enacted~~

These laws are broad in ~~2010. The Affordable Care Act, among other things, amends the intent requirement of the federal Anti-Kickback Statute~~scope and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

~~Because of the breadth of these laws~~available exceptions and ~~the narrowness of available statutory and regulatory~~ exemptions are narrow; it is possible that some of our activities could be subject to challenge under one or more of such laws. Any action brought against us for violations of these laws or regulations, even successfully defended, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. We may be subject to private “qui tam” actions brought by individual whistleblowers on behalf of the federal or state governments, with potential liability under the federal ~~False Claims Act~~FCA including mandatory treble damages and significant per-claim penalties, which were increased from $12,537 to ~~$11,665 to $23,331~~$25,076 per false claim in ~~2020.~~May 2022. For example, our industry has experienced recent False Claims Act enforcement, which highlights the importance of compliance with the rules and regulations governing claims submitted to federal healthcare programs.

Although we have adopted policies and procedures designed to comply with these laws and regulations and conduct internal reviews of our compliance with these laws, our compliance is also subject to governmental review. The growth of our business and sales organization and our expansion outside of the United States may increase the potential of violating these laws or our internal policies and procedures. The risk of our being found in violation of these or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of the federal, state, ~~and~~or foreign laws described above or any other current or future fraud and abuse or other healthcare laws and regulations that apply to us, we may be subject to penalties, including significant criminal, civil, and administrative penalties, damages, fines, imprisonment for individuals, exclusion from participation in government programs, such as Medicare, and ~~Medicaid, and~~ we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business and our financial results.

~~If we fail to obtain and maintain necessary regulatory clearances~~Changes in applicable laws or ~~approvals for~~regulations or the ~~Zio monitors~~interpretation or enforcement policies of regulators governing our IDTFs and Zio ~~service,~~Services may constrain or ~~if clearances~~require us to restructure our operations or ~~approvals for future products~~adapt certain business strategies which may harm our revenue and ~~indications are delayed or not issued, our commercial operations would be harmed.~~

The Zio monitors, including the associated software and algorithm, and the Zio service are subject to extensive regulation by the FDA in the United States, and by the Competent Authorities in the European Union and the United Kingdom. Such regulations are wide ranging and govern, among other things:

•~~product design, development, manufacture, and release;~~

•~~laboratory, preclinical and clinical testing, labeling, packaging, storage and distribution;~~

•~~premarketing clearance or approval;~~

•~~service operations~~

•~~record keeping;~~

•~~product marketing, promotion and advertising, sales and distribution; and~~

•~~post-market surveillance, including reporting of deaths or serious injuries and certain categories of field correction and removals.~~operating results.

~~Before a new medical device or service, or a new intended use for an existing product or service, can be marketed~~Healthcare laws and regulations, and interpretations of the same, change frequently and may change significantly in the United States, a company must first submit and receive either 510(k) clearance or premarketing approval from the FDA, unless an exemption applies. Either process can be expensive, lengthy and unpredictable.future. We may not be able to ~~obtain~~adapt our operations to address every new regulation or interpretation, and new regulations or interpretations may adversely affect our business. We also cannot assure that a review of our business by courts or regulatory authorities would not result in a determination that adversely affects our revenue and operating results.

Our business relies on orders from licensed healthcare providers, and the ~~necessary clearances~~ continuing clinical acceptance and adoption of our Zio Services depends upon strong working relationships with healthcare providers, including physicians. These relationships, interactions, and arrangements are subject to a high degree of scrutiny by government regulators and enforcement bodies.

As a CMS-enrolled IDTF, we may only provide our Zio Services upon receipt of a valid order from a licensed healthcare provider for use in the diagnosis and treatment of a patient’s medical condition. Accordingly, our revenue and the success of our business rely on the continued clinical acceptance and adoption of our Zio Services by healthcare providers whose patients require remote cardiac monitoring services. In addition to continuing to demonstrate the clinical value of our Zio Services, we also must support widespread clinical acceptance and adoption of our Zio Services by maintaining strong working relationships with these healthcare providers, including physicians. However, as we work to establish and maintain these relationships, we face significant scrutiny of these relationships, interactions, and arrangements by government regulators and enforcement agencies. Failure to maintain these relationships, interactions, and arrangements in compliance with applicable laws and regulations, including those targeted at fraud and abuse like the federal Anti-Kickback Statute and the False Claims Act, could expose us to significant legal and financial repercussions, including government civil and criminal investigations, civil monetary penalties, criminal penalties, and/or ~~approvals~~exclusion from federal healthcare programs.

Our communications with healthcare stakeholders – physicians and other healthcare professionals, payors and similar entities, as well as patients and lay caregivers – are subject to a high degree of scrutiny for compliance with a wide range of laws and regulations. Continuing or increasing our sales and marketing and other external communication efforts may expose us to additional risk of being alleged or deemed to be non-compliant by regulatory, enforcement authorities, or competitors.

Our sales and marketing efforts and initiatives may subject us to additional scrutiny of our practices of effective communication of risk information, benefits, or claims under the oversight of the FDA, the Federal Trade Commission (“FTC”), or both agencies. For example, the FDA applies a heightened level of scrutiny to comparative claims when applying its statutory standards for advertising and promotion, including with regard to its requirement that promotional labeling be truthful and not misleading. There is potential for differing interpretations of whether certain communications are consistent with a product’s FDA-required labeling, and FDA will evaluate communications on a fact-specific basis. The FTC also recently released updated guidance on health claims, with a high expectation for clinical data to support these claims.

In addition, making comparative claims may draw scrutiny from our competitors. Where a company makes a claim in advertising or promotion that its product is superior to the product of a competitor (or that the competitor’s product is inferior), this creates a risk of a lawsuit by the competitor under federal and state false advertising or unfair and deceptive trade practices law, and possibly also state libel law. Such a suit may seek injunctive relief against further advertising, a court order directing corrective advertising, and compensatory and punitive damages where permitted by law. If our compliance program and training and monitoring do not effectively keep pace with our sales and marketing growth, we may encounter increased risk in execution of activities by our personnel, potential enforcement and other exposure.

We may also seek to communicate certain information with physicians and scientists or with payors and similar entities, and may rely on a range of laws, regulations, regulatory guidance governing topics including scientific exchange and communication of healthcare economic information (“HCEI”) and product information under the Preapproval Information Exchange Act.

Changes in laws and regulations governing our communications with patients or the interpretation or enforcement policies of regulators could subject us to regulatory scrutiny, damage awards, or fines.

As a Medicare-enrolled IDTF, we are prohibited from directly soliciting patients for diagnostic medical procedures. While we can engage in general marketing initiatives, consistent with applicable law, we cannot make telephone, computer, and in-person contacts for the purpose of soliciting business for our IDTF.

Regarding patients for whom we have received a valid order for our Zio Services, we may send or make text messages, emails, phone calls and other communications for various informational, business purposes, including to confirm accurate demographic and payor information or to assist a patient via a home hookup. Communication-related laws require consent prior to certain communications and provide a specified monetary damage award or fine for each violation could result in particularly significant damage awards or fines. For example, under the Telephone Consumer Protection Act (“TCPA”), plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may treble the damage award for willful or knowing violations. In the wake of a 2021 decision by the U.S. Supreme Court that limited the applicability of the TCPA, several states have enacted or introduced legislation that would regulate text messages and certain telephone calls to individuals. We may be ~~unduly delayed~~subject to lawsuits (including class-action lawsuits) containing allegations that our business violated the TCPA or other communications laws. These lawsuits may seek damages (including statutory damages) and injunctive relief, among other remedies. A determination that there have been violations of the TCPA or other statutes regulating communications with patients could expose us to significant damage awards that could, individually or in ~~doing so, which could~~the aggregate, materially harm our business. ~~Furthermore, even~~

While most of our revenue results from claims submitted to payors for diagnostic medical procedures, we offer, and are looking to expand, alternative payment and service delivery models. Piloting, evaluating, and implementing these alternative payment and service delivery models requires interactions with commercial payors, physicians, and patients; these interactions are subject to laws and regulations aimed at preventing healthcare fraud and abuse. If these models are unsuccessful, or if we are ~~granted regulatory clearances~~unable to fully comply with such laws as we pursue these strategies, our commercial success could be compromised and we could face substantial penalties.

Our operations may be directly or ~~approvals, they~~indirectly affected by various broad state and federal healthcare fraud and abuse laws, including the AKS, the FCA, the Anti-Mark Up Rule, and the Medicare Beneficiary Inducement Statute. For some of our services, we directly bill physicians or other healthcare entities, that, in turn, bill payors, and the amounts we bill may include ~~significant limitations on the indicated uses for the product, which may limit the market for the product.~~a risk-based pricing component. We are also developing alternative service delivery models that include using our Zio XT System to screen at-risk patient populations as part of a value-added service offered by managed care organizations, including Medicare Advantage Organizations, to qualifying participants. Although we ~~have obtained 510(k) clearance~~believe these billing and service models and our program development efforts are properly designed to ~~market~~comply with laws and regulations, these types of initiatives may draw a high degree of scrutiny and may subject us to assertions of non-compliance. If our past, present, or future operations are found to be in violation of fraud and abuse laws, we or our officers may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare program participation. Furthermore, if we knowingly file, or “cause” the ~~Zio monitors and the Zio service (Software~~filing of, false claims for reimbursement with government programs such as ~~a Medical Device elements), our clearance can be revoked if safety, efficacy, or significant regulatory compliance problems develop.~~

In addition, we are required to file various reports with the FDA, and E.U. or U.K. regulators, including reports required by the Medical Device Reporting Regulations (“MDRs”) that require that we report to the regulatory authorities if our Zio service may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. If these reports are not filed in a timely manner, regulators may impose sanctions andMedicare, we may be subject to ~~product liability~~substantial civil penalties, including treble damages.

Risks Related to Financial and Accounting Matters

In the future we may identify additional material weaknesses or ~~regulatory enforcement~~otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.

We previously identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As previously disclosed, in preparing our consolidated financial statements as of and for the years ended December 31, 2021 and 2020, our management concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to a failure to maintain a sufficient number of professionals with an appropriate level of accounting and internal control knowledge, training, and experience to timely and accurately analyze, record, and disclose accounting matters. This material weakness contributed to additional material weaknesses, which have been previously disclosed and remediated. In aggregate, these material weaknesses (including the previously remediated material weaknesses) contributed to the misstatement of our revenues, revenue reserves, bad debt expense, property and equipment, research and development expense, and related financial disclosures, and in the revision of the Company’s consolidated financial statements for the years ended December 31, 2017, December 31, 2018, and each interim period therein as well as the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019. Additionally, this material weakness could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

To address this material weakness, we took actions designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weakness, including hiring additional accounting and finance personnel with an appropriate level of expertise, providing for additional management oversight over financial reporting including through the establishment of a SOX Steering Committee within our internal audit function, and implementing new controls and processes. As of the year ended December 31, 2022, we concluded that our remediation efforts have been successful and that the previously identified material weakness in internal control over financial reporting has been remediated. However, while the material weakness has been remediated, we continue to seek improvements to enhance our control environment and to strengthen our internal controls to provide reasonable assurance that our financial statements continue to be fairly stated in all ~~of which could harm our business.~~material respects.

If we ~~initiate~~discover additional weaknesses in our system of internal financial and accounting controls and procedures, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

Any failure to implement and maintain effective internal control over financial reporting could cause investors to lose confidence in our reported financial and other information, adversely impact our stock price, cause us to incur increased costs to remediate any deficiencies, and attract regulatory scrutiny or lawsuits that could be costly to resolve and distract management’s attention, limit our ability to access the capital markets or cause our stock to be delisted from The Nasdaq Global Select Market or any other securities exchange on which it is then listed. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

Our financial results may fluctuate significantly from quarter-to-quarter and may not fully reflect the underlying performance of our business.

Our revenue and operating results may fluctuate significantly from quarter to quarter as a ~~correction~~result of a variety of factors, a number of which are outside our control, and may therefore not fully reflect the underlying performance of our business. Such factors may include, for example, seasonal variations in prescription rates. We typically experience reduced revenue during the third quarter, as well as during the year-end holiday season. We believe this is the result of physicians and patients taking vacations, and patients electing to delay our monitoring services during the summer months and holidays. We believe that period-to-period comparisons of our operating results may not be meaningful and should not be relied on as an indication of our future performance. If quarterly revenues or ~~removal~~operating results fall below the expectations of investors or public market analysts, the trading price of our common stock could decline substantially. Factors that might cause quarterly fluctuations in our operating results include:

•our inability to manufacture an adequate supply of our Zio Systems to support demand for our Zio ~~service~~Services at appropriate quality levels and acceptable costs;

•possible delays in our research and development programs or in the completion of any third-party clinical trials relating to ~~reduce~~ our Zio Services;

•a ~~risk~~lack of acceptance of our Zio Services, including our Zio Systems, by physicians and potential patients;

•the inability of patients to ~~health posed by~~ receive reimbursements from third-party payors;

•the ~~Zio service, we would be required to submit a publicly available Correction~~purchasing patterns of physicians and ~~Removal report to the FDA and, in many cases, similar reports to other regulatory agencies. This report could be classified by the FDA~~patients, including as a ~~device recall~~result of seasonality;

•failures to comply with regulatory requirements, which could lead to ~~increased scrutiny by the FDA, other international regulatory agencies and our customers regarding the quality and safety~~withdrawal of our Zio ~~service. Furthermore,~~Services, including our Zio Systems, from the ~~submission~~market;

•our failure to continue the commercialization of ~~these reports~~our Zio Services;

•competition;

•inadequate financial and other resources; and

•global political and economic conditions, including inflation, increasing interest rates and the persisting impacts of the COVID-19 pandemic, instability in the global banking system, political instability, and military hostilities, including the ongoing military conflict between Russia and Ukraine.

Further, we recognize a portion of our revenue from non-contracted third-party commercial payors. For example, during the year ended December 31, 2022 and three months ended March 31 2023, revenue from non-contracted third-party commercial payors accounted for approximately six percent of our total revenue. We have limited visibility as to when we will receive payment for our Zio Services with non-contracted payors and we or XIFIN must appeal any negative payment decisions, which often delays collections further. Additionally, a portion of the revenue from non-contracted payors is received from patient co-pays, which we may not receive for several months following delivery of service or may not receive at all. For revenue related to non-contracted payors, we estimate an average collection rate based on factors including historical cash collections. Subsequent adjustments, if applicable, are recorded as an adjustment to revenue. Fluctuations in revenue may make it difficult for us, research analysts, and investors to accurately forecast our revenue and operating results or to assess our actual performance. If our revenue or operating results fall below expectations, the price of our common stock would likely decline.

We have a history of operating losses and may not achieve or sustain profitability in the future.

We have incurred net losses since our inception in September 2006. We generated net losses of $39.1 million and $50.6 million during the three months ended March 31, 2023 and 2022 and $116.2 million and $101.4 million during fiscal 2022 and 2021, respectively. As of March 31, 2023, we had an accumulated deficit of $561.3 million. We have financed our operations to date primarily through private and public offerings of equity securities and revenue generated by prescriptions of our Zio Services. We have and expect to continue to incur significant research and development, sales and marketing, regulatory, and other expenses as we expand our marketing efforts to increase the prescription of our Zio Services, expand existing relationships with physicians, obtain regulatory clearances or approvals for our current or future services and related devices, conduct clinical trials on our existing and future services, and develop new services or add new features to our existing Zio Services. We also expect that our general and administrative expenses will continue to increase due, among other things, to the operational and regulatory burdens applicable to medical service providers that are public ~~and could be used by competitors against us and cause physicians~~companies. As a result, we expect to ~~delay or cancel prescriptions, which could harm~~continue to incur operating losses in the future. These losses, among other things, may have an adverse effect on our ~~reputation.~~

If we assess a potential quality issue or complaint as not requiring either field action or notification, respectively, regulators may review documentation of that decision during a subsequent audit. If regulators disagree with our decision, or take issue with either our investigation process or the resulting documentation, regulatory agencies may impose sanctions and we may be subject to regulatory enforcement actions, including warning letters, all of which could harm our business.

~~The FDA~~stockholders’ equity and the ~~Federal Trade Commission (“FTC”) also regulate the advertising and promotion~~value of our products and services to ensure that the claims we make are consistent with our regulatory clearances, that there is adequate and reasonable data to substantiate the claims and that our promotional labeling and advertising is neither false nor misleading. If the FDA or FTC determines that any of our advertising or promotional claims are misleading, not substantiated or not permissible, we may be subject to enforcement actions, including warning letters, and we may be required to revise our promotional claims and make other corrections or restitutions. Similar to the FDA and FTC, the European Union under the EU Medical Device Regulations and the United Kingdom under the UK Medical Device Regulations have similar requirements and enforcement action regarding promotional material.

The FDA and state and international authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by any such agency, which may include any of the following sanctions:common stock.

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•~~adverse publicity, warning letters, fines, injunctions, consent decrees and civil penalties;~~

•~~repair, replacement, refunds, recall or seizure~~We may require additional capital to support the growth of ~~our products;~~

•~~operating restrictions, partial suspension or total shutdown of either production, distribution or service operation;~~

•~~denial of our requests for regulatory clearance or premarket approval of new products or services, new intended uses or modifications to existing products or services;~~

•~~withdrawal of regulatory clearance or premarket approvals that have already been granted; and~~

•~~criminal prosecution.~~

~~If any of these events were to occur,~~ our business, and ~~financial condition could~~this capital might not be ~~harmed.~~available on acceptable terms, if at all.

~~Material modifications~~

Our operations have consumed substantial amounts of cash since inception. We intend to ~~the Zio monitors, labeling of the Zio monitors, or Zio service~~continue to make investments to support our business, which may require ~~new 510(k) clearances, CE Mark, UKCA Mark~~us to engage in equity or ~~other premarket approvals~~debt financings to secure additional funds. Additional financing may not be available on a timely basis on terms acceptable to us, or at all. Any additional financing may be dilutive to stockholders or may require us to ~~recall or cease~~grant a lender a security interest in our assets. The amount of funding we may need will depend on many factors, including:

•the revenue generated by our Zio Services;

•the costs, timing, and risks of delay of additional regulatory approvals;

•the expenses we incur in manufacturing, developing, selling, and marketing our Zio Services;

•our ability to scale our manufacturing operations to meet demand for the Zio Systems used in our current and any future Zio Services or other offerings;

•the costs of filing, prosecuting, defending, and enforcing any patent claims and other intellectual property rights;

•the rate of progress and cost of our clinical trials and other development activities;

•the success of our research and development efforts;

•the emergence of competing or complementary technologies;

•the terms and timing of any collaborative, licensing, and other arrangements that we may establish;

•the cost of ongoing compliance with legal and regulatory requirements, and third-party payors’ policies;

•the cost of obtaining and maintaining regulatory or payor clearance or approval for our current or future offerings including those integrated with other companies’ products; and

•the acquisition of business, products, and ~~services until clearances~~technologies.

If adequate funds are ~~obtained.~~

Material modifications to the intended use or technological characteristics of the Zio monitors or Zio service will require new 510(k) clearances, premarket approvals or CE Mark certification (E.U.) or UKCA Mark certification (U.K.), or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. Based on FDA published guidelines, the FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new clearance or approval; however, the FDA can review a manufacturer’s decision. Any modification to an FDA cleared device or service that would significantly affect its safety or efficacy or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly a premarket approval. Weavailable, we may not be able to ~~obtain additional 510(k) clearances~~ commercialize our Zio Services at the rate we desire and/or ~~premarket approvals for new products~~we may have to delay the development or ~~for modifications~~commercialization of our Zio Services or license to third parties the rights to commercialize services or additional indications for, the Zio monitors or Zio service in a timely fashion, or at all. Delays in obtaining required future clearances would harm our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. We have made modifications to the Zio monitors and Zio service in the pasttechnologies that we ~~believe do not require additional clearances~~would otherwise seek to commercialize. We also may have to reduce sales, marketing, customer support, or ~~approvals, and we may make additional modifications in the future. If the FDA or a Notified Body disagrees and requires new clearances or approvals for any~~other resources devoted to our Zio Services. Any of these ~~modifications, we may be required to recall and to stop selling or marketing the Zio monitors and Zio service as modified, which~~factors could harm our business and financial condition.

Our ability to use our net operating ~~results and require us~~losses to ~~redesign our products or services. In these circumstances, we~~offset future taxable income may be subject to ~~significant enforcement actions.~~

If we or our suppliers fail to comply with the FDA’s QSR or the European Union’s Medical Device Directive and Medical Device Regulations, or United Kingdom's Medical Device Regulations, our manufacturing or distribution operationscertain limitations which could ~~be delayed or shut down and our revenue could suffer.~~

Our manufacturing and design processes and those of our third-party suppliers are required to comply with the FDA’s Quality System Regulation (“QSR”) and the EU’s Medical Device Directive (“MDD”), through May 2021, after which time compliance with the MDR transitional provisions will be required until full transition to MDR compliance is achieved. Additionally, the UK will require the UKCA marking per new policies released by MHRA. All of these regulations cover procedures and documentation requirements for the design, testing, production, control, quality assurance, labeling, packaging, storage, shipping, and post-market surveillance of Zio monitors and associated software. We are also subject to similar state requirements and licenses, and to ongoing ISO 13485:2016 compliance in all operations to maintain our CE Mark. In addition, we must engage in extensive recordkeeping and reporting and must make available our facilities and records for periodic unannounced inspections by governmental agencies, including the FDA, state authorities, Notified Bodies and comparable agencies in other countries. If we perform poorly in a regulatory inspection, our operations could be disrupted and our manufacturing interrupted. Failure to take adequate corrective action in response to an adverse regulatory inspection could result in, among other things, a shutdown of our manufacturing or product distribution operations, significant fines, suspension of marketing clearances and approvals, seizures or recalls of our device, operating restrictions, warning letters, and criminal prosecutions, any of which would cause our business to ~~suffer. Furthermore,~~higher tax liability.

Our ability to use our ~~key component suppliers~~net operating losses (“NOLs”) to offset future taxable income may ~~not currently~~ be ~~or may not continue to be in compliance with applicable regulatory requirements, which may result in manufacturing delays for our product and cause our revenue to decline.~~

~~We are registered with the FDA as a medical device specifications developer and manufacturer. The FDA has broad post-market and regulatory enforcement powers. We are~~ subject to ~~announced or unannounced inspections by~~certain limitations which could subject our business to higher tax liability. We may be limited in the ~~FDA~~portion of NOL carryforwards that we can use in the future to offset taxable income for U.S. federal and ~~the Food~~state income tax purposes, and ~~Drug Branch~~federal tax credits to offset federal tax liabilities. Sections 382 and 383 of the ~~California Department~~Internal Revenue Code of ~~Public Health (“CDPH”)~~1986, as amended, and similar state law provisions, limit the use of NOLs and tax credits after a cumulative change in corporate ownership of more than 50% occurs within a three-year period. The statutes place a formula limit on how much NOLs and tax credits a corporation can use in a tax year after a change in ownership. Avoiding an ownership change is generally beyond our control. We could experience an ownership change that might limit our use of NOLs and tax credits in the future. In addition, realization of deferred tax assets, including NOL carryforwards, depends upon our future earnings in applicable tax jurisdictions. If we have insufficient future taxable income in the applicable tax jurisdiction for any reason, including any future corporate reorganization or restructuring activities, we may be limited in our ability to ~~determine~~utilize some or all of our ~~compliance with~~net operating losses to offset such income and reduce our tax liability in that jurisdiction. See Note 10, Income Taxes to the ~~QSR and other regulations at both~~consolidated financial statements included in our ~~design and manufacturing facilities, and these inspections may include~~Annual Report on Form 10-K for the ~~manufacturing facilities~~year ended December 31, 2022 for additional information.

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There is also a risk that due to regulatory changes or changes to federal or state law, such as suspensions on the use of NOLs, or other unforeseen reasons, our ~~suppliers. The most recent FDA inspection~~existing NOLs could expire or otherwise be unavailable either in whole or in part to offset future income tax liabilities. For example, under the Coronavirus Aid, Relief, and Economic Security Act of ~~our manufacturing facility occurred~~2020, which amended certain provisions of the Tax Cuts and Jobs Act (“TCJA”), NOLs arising in ~~October 2021~~taxable years beginning after December 31, 2017 may offset no more than 80% of current taxable income annually for taxable years beginning after December 31, 2020. Therefore, we may be required to pay U.S. federal income taxes in future years despite the NOL carryforwards we have accumulated.

Risks Related to Other Legal and ~~no FDA Form 483 observations were issued. The FDA also performed a Remote~~ Regulatory Assessment (“RRA”) of our design facilities in San Francisco, California, which concluded in May 2021. Unlike on-site inspections, the FDA does not issue formal 483 observations at the conclusion of RRAs.Matters

We are also registered with the EU as a medical device developer, manufacturer, distributor, and service operator through the National Standard Authority of Ireland (“NSAI”) our European Notified Body. Most recently, the NSAI completed an ISO 13485 surveillance audit of our design, manufacturing and service operations in May 2021 and a renewal of our ISO 13485 certification was issued in August 2021.

We can provide no assurance that we will continue to remain in compliance with the QSR or MDD, MDR, or UK MDR. If the FDA, CDPH, NSAI, or other EU or UK Notified Bodies inspect any of our facilities and discover compliance problems, we may have to cease manufacturing and product distribution until we can take the appropriate remedial steps to correct the audit findings. Taking corrective action may be expensive, time consuming and a distraction for management and if we experience a delay at our manufacturing facility we may be unable to produce Zio monitors, which would harm our business.

~~Zio monitors may in the future be~~ subject to ~~product recalls~~legal proceedings and government investigations that could ~~harm~~adversely affect our ~~reputation.~~

The FDA and similar governmental authorities in other countries have the authority to require the recall of commercialized products in the event of material regulatory deficiencies or device defects. A government mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors, design issues, labeling issues, or various regulatory compliance topics. Recalls of Zio monitors and associated software would divert managerial attention, be expensive, harm our reputation with customers and harm ourbusiness, financial condition, and results of operations. ~~A recall announcement would also negatively affect~~

We are involved in legal proceedings related to securities litigation and may become involved in other legal proceedings that arise from time to time in the future. For example, as discussed further in Note 8, Commitments and Contingencies, to our ~~stock price.~~condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, a putative securities class action lawsuit has been filed against the Company and certain current officers or former officers of the Company alleging violations of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder.

~~Healthcare reform measures could hinder~~

Any claims against us, whether meritorious or ~~prevent~~not, can be time-consuming, result in costly litigation, be harmful to our reputation, require significant management attention, and divert significant resources. In addition, the ~~Zio service’s commercial success.~~

Inexpense of litigation and the ~~United States, there have been,~~timing of this expense from period to period are difficult to estimate and subject to change. Litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. Given the uncertain nature of legal proceedings generally, we ~~expect there will continue~~are not able in all cases to ~~be, a number~~estimate the amount or range of ~~legislative and regulatory changes to the healthcare system in ways~~loss that could harm our future revenues and profitability and the demand for the Zio service. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. The Affordable Care Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. We face uncertainties that might result from ~~modifications~~an unfavorable outcome. We could incur judgments or ~~repeal~~enter into settlements of any of the provisions of the Affordable Care Act, including as a result of current and future executive orders and legislative actions. The impact of those changes on us and potential effect on the medical device industry as a whole is currently unknown. Any changes to the Affordable Care Act are likely to have an impact on our results of operations, and mayclaims that could have a material adverse effect on our results of ~~operations. We cannot predict what other health care programs~~operations in any particular period.

In addition, healthcare companies are subject to numerous investigations and ~~regulations will ultimately be implemented at~~inquiries by various governmental agencies. For example, as discussed further in Note 8, Commitments and Contingencies, to our condensed consolidated financial statements, in March 2021, we received a grand jury subpoena from the ~~federal or state level or~~U.S. Attorney’s Office for the ~~effect~~Northern District of ~~any future legislation or regulation~~California requesting information related to communications with the FDA and our Zio Systems, and, in October 2021, received a subpoena requesting additional information. More recently, on April 4, 2023, we received a Subpoena Duces Tecum from the ~~United States may have on our business.~~

~~The continuing efforts~~Consumer Protection Branch, Civil Division of the ~~government, insurance companies, managed care organizations~~U.S. Department of Justice, requesting production of various documents regarding our products and ~~other payors~~services. We are cooperating fully in connection with these matters. Any future investigations of ~~healthcare services~~our executives, our managers, or our company could result in significant liabilities or penalties to ~~contain~~us, as well as adverse publicity. Even if we are found to have complied with applicable law, the investigation or ~~reduce costs~~litigation may pose a considerable expense and would divert management’s attention, and have a potentially negative impact on the public’s perception of ~~healthcare may harm:~~

•us, all of which could negatively impact our ~~ability to set a price that~~financial position and results of operations. Further, should we ~~believe is fair for~~be found out of compliance with any of these laws, regulations, or programs, depending on the nature of the findings, our ~~Zio service;~~business, our financial position, and our results of operations could be negatively impacted.

•~~our ability to generate revenue and achieve or maintain profitability; and~~

•~~the availability of capital.~~

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Compliance with ~~environmental laws and regulations could be expensive, and failure to comply with these laws and regulations could subject us to significant liability.~~

Our research and development and manufacturing operations may involve the use of hazardous substances and are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to the storage, use, discharge, disposal, remediation of, and human exposure to, hazardous substances and the sale, labeling, collection, recycling, treatment and disposal of products containing hazardous substances. Liability under environmental laws and regulations can be joint and several and without regard to fault or negligence. Compliance with environmental laws and regulations may be expensive and noncompliance could result in substantial liabilities, fines and penalties, personal injury and third-party property damage claims and substantial investigation and remediation costs. Environmental laws and regulations could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We cannot assure you that violations of these laws and regulations will not occur in the future or have not occurred in the past as a result of human error, accidents, equipment failure or other causes. The expense associated with environmental regulation and remediation could harm our financial condition and operating results.

~~Exposure to United Kingdom political developments, including the outcome of its withdrawal from membership in the~~

~~European Union, could be costly and difficult to comply with and could seriously harm our business.~~

We have based a significant portion of our non-U.S. operations in the United Kingdom. In June 2016, a referendum was held in the U.K. which resulted in a majority voting in favor of the U.K. withdrawing from the E.U. (commonly referred to as "Brexit"). Pursuant to legislation approved by the U.K. Parliament and the E.U. Parliament in January 2020, the U.K. withdrew from the E.U. with effect from 11 p.m. (GMT) on January 31, 2020 on the terms of a withdrawal agreement agreed between the U.K. and the E.U. in October 2019. On December 24, 2020, the U.K. and E.U. agreed to a trade deal (the “Trade and Cooperation Agreement”) which was ratified by the U.K. on December 30, 2020. The Trade and Cooperation Agreement is subject to formal approval by the European Parliament and the Council of the European Union before it comes into effect and has been applied provisionally since January 1, 2021. There are still a number of areas of uncertainty in connection with the future of the U.K. and its relationship with the E.U. and the application and interpretation of the Trade and Cooperation Agreement, and Brexit related matters may take several years to be clarified and resolved.For example, because a significant proportion of the regulatory framework in the U.K. is currently derived from E.U. directives and regulations, Brexit could result in material changes to the regulatory regime applicable to many of our current operations. Although the Trade and Cooperation Agreement offers U.K. and E.U. companies preferential access to each other’s markets, ensuring imported goods will be free of tariffs and quotas, economic relations between the U.K. and the E.U. will now be on more restricted terms than existed previously. Therefore, at this time, we cannot predict the impact that the Trade and Cooperation Agreement and any future agreements contemplated under the terms of the Trade and Cooperation Agreement will have on our future business efforts to commercialize our Zio service in the U.K. and E.U. Accordingly, it is possible that new terms of the Trade and Cooperation Agreement may adversely affect our operations and financial results. We are currently in the process of evaluating our own risks and uncertainties to ascertain what financial, trade, regulatory and legal implications the Trade and Cooperation Agreement could have on our operations in the U.K. and otherwise. Finally, uncertainty surrounding Brexit has contributed to recent fluctuations in the U.K. economy as a whole which could experience future disruptions. As a result, Brexit could cause financial and capital markets within and outside the U.K. or the E.U. to constrict, thereby negatively impacting our ability to finance our U. K. operations which could also have an adverse effect on our results of operations and financial condition.

~~Risks Related to Our Common Stock~~

~~Future sales and issuances of securities could negatively affect our stock price and dilute the ownership interest of our existing investors.~~

Our expected future capital requirements may depend on many factors, including expanding our customer base, the expansion of our salesforce, and the timing and extent of spending on the development of our technology to increase our product offerings. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Additionally, new investors could gain rights, preferences and privileges senior to those of existing holders of our common stock. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.

Sales or issuances of a substantial amount of securities, or the perception that such sales could occur, may cause a decline in the price of our common stock. Future resales of our common stock by our existing stockholders could cause the market price of our common stock to decline. In addition, the shares of common stock subject to outstanding options and restricted stock units under our 2016 Equity Incentive Plan and our 2016 Employee Stock Purchase Plan and the shares reserved for future issuance

~~under both such plans may become eligible for sale in the public markets in the future, subject to certain legal and control limitations.~~

We may sell shares or other securities in any offering at a price per share that is less than the price per share paid by existing investors, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by existing investors.

~~The market price of our common stock may fluctuate substantially, and you could lose all or part of your investment.~~

The market price of our common stock may continue to fluctuate substantially in response to, among other things, the risk factors described in this Quarterly Report on Form 10-Q and other factors, many of which are beyond our control, including:

•~~changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ estimates;~~

•~~quarterly variations in our or our competitors’ results of operations;~~

•~~the impact or anticipated impact of the COVID-19 pandemic on us;~~

•~~periodic fluctuations in our revenue, due in part to the way in which we recognize revenue;~~

•~~the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;~~

•general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors, including deteriorating market conditions due to investor concerns regarding inflation and continuing hostilities between Russia and Ukraine, which could lead to volatility in foreign currency and capital markets;

•~~changes in reimbursement coverage and rates by current or potential payors;~~

•~~changes in CPT codes or the establishment of new CPT codes applicable to the Zio service;~~

•~~changes in operating performance and stock market valuations of other technology companies generally, or those in the medical device industry in particular;~~

•~~actual or anticipated changes in regulatory oversight of our products;~~

•~~the results of our clinical trials;~~

•~~the loss of key personnel, including changes in our board of directors and management;~~

•~~legislation or regulation affecting our market;~~

•~~lawsuits threatened or filed against us;~~

•~~the announcement of new products or product enhancements by us or our competitors;~~

•~~announced or completed acquisitions of businesses or technologies by us or our competitors;~~

•~~announcements related to patents issued to us or our competitors and to litigation; and~~

•~~developments in our industry.~~

Fluctuations in our stock price, volume of shares traded, and changes in our market valuations may make our stock less attractive to certain investors. Stockholders may file securities class action litigation following periods of market volatility. Securities litigation, like the current action we are subject to in the District Court for the Northern District of California, could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business, results of operations, financial condition, reputation and cash flows. These factors may materially and adversely affect the market price of our common stock.

If securities or industry analysts do not publish research or reports about our business, or if they issue adverse or misleading opinions regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our target studies and operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to

~~publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.~~

~~The~~ requirements of being a public company matters and reporting may strain our resources and divert management’s ~~attention and affect our ability to attract and retain executive management and qualified board members.~~attention.

As a public company, we are subject to ~~the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd Frank Act, the listing requirements of The NASDAQ Stock Market~~laws and ~~other applicable securities laws, rules and regulations. Compliance with these laws, rules and~~ regulations will increase our legal and financial compliance costs, make some activities more difficult, time consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, our management and other personnel divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404. We continue to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. We cannot predict or estimate the amount of additional costs we will incur in order to remain compliant with our public company reporting requirements or the timing of such costs. Additional compensation costs and any future equity awards will increase our compensation expense, which will increase our general and administrative expense and could adversely affect our profitability.

~~In addition, changing laws, regulations and standards~~ relating to corporate governance and public disclosure, ~~are creating uncertainty for public companies, increasing~~including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the rules and regulations implemented by the SEC, and The Nasdaq Stock Market listing rules. Compliance with these laws and regulations, including new laws and regulations or revisions to existing laws and regulations, has required and will continue to require substantial management time and oversight and the incurrence of significant accounting and legal ~~and financial compliance costs and making some activities more time consuming.~~costs. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to continue to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from ~~revenue generating~~revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be ~~harmed.~~adversely affected.

We could be subject to changes in our tax rates, new U.S. or international tax legislation, or additional tax liabilities.

We are subject to taxes in the United States and numerous foreign jurisdictions, where certain of our subsidiaries are organized. The tax laws in the United States and in other countries in which we and our subsidiaries do business could change on a ~~public company,~~prospective or retroactive basis, and any such changes could adversely affect our business and financial condition. Our effective tax rates could be affected by numerous factors, including changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws or their interpretation, both in and outside the United States.

For example, in 2017, the U.S. government enacted the TCJA, which made significant changes to the taxation of business entities, including a permanent reduction to the corporate income tax rate, changes in the taxation of foreign earnings, and limitations on the deductibility of expenses. Although we are still awaiting guidance from the Internal Revenue Service on how some of the TCJA changes will impact us, beginning in 2022, the TCJA eliminated the option to immediately deduct research and development expenditures and required taxpayers to amortize domestic expenditures over five years and foreign expenditures over fifteen years. While it is possible that Congress may modify or repeal this provision, we have no assurance that this provision will be modified or repealed and even if Congress makes any such decision, it may not be retroactive to January 1, 2022, and could still therefore result in an impact on cash from operating activities and on the balance of our deferred taxes. In addition, we have a significant presence in the United Kingdom, as well as significant sales in the United Kingdom, such that any changes in tax laws in the United Kingdom will impact our business. The overall impact of these changes is uncertain, and our business and financial condition could be adversely affected.

Our tax returns and other tax matters also are subject to examination by the U.S. Internal Revenue Service and other tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. We cannot guarantee the outcome of these examinations. If our effective tax rates were to increase, particularly in the United States, or in other jurisdictions implementing legislation to reform existing tax legislation, including the United Kingdom, or if the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our financial condition, operating results, and cash flows could be adversely affected.

We may be liable for contamination or other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional expense.

Our research and development and manufacturing operations may involve the use or handling of hazardous materials. We are subject to a variety of federal, state, local, and international laws, rules, and regulations governing the use, handling, storage, disposal and remediation of hazardous and biological materials, as well as the sale, labeling, collection, recycling, treatment, and disposal of products containing such hazardous substances, and we incur expenses relating to compliance with these laws and regulations. If we violate environmental, health and safety laws, including as a result of human error, equipment failure, or other cases, we could face substantial liabilities, fines, and penalties, personal injury and third-party property damage claims, and substantial investigation and remediation costs. These expenses or this liability could have a significant negative impact on our financial condition. Environmental laws could become more ~~expensive~~stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We are subject to potentially conflicting and changing regulatory agendas of political, business, and environmental groups. Changes to or restrictions on the procedures for hazardous or biological material storage or handling might require unplanned capital investment or relocation of our facilities. Failure to comply, or the cost of complying, with new or existing laws or regulations could harm our business, financial condition, and results of operations.

Risks Related to Intellectual Property

We are subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from shipping affected devices, require us to obtain ~~director~~licenses from third parties or to develop non-infringing alternatives, and ~~officer liability insurance,~~subject us to substantial monetary damages and injunctive relief.

We rely on a combination of patents, copyrights, trademarks, trade secret laws, and confidentiality and invention assignment agreements with employees and third parties to protect our intellectual property rights. Our patents and patent applications are directed to covering key aspects of the design, manufacture and use of our Zio Services, including our Zio Systems.

Third parties may assert infringement or misappropriation claims against us with respect to our current or future Zio Services, including our Zio Systems. We are aware of numerous patents issued to third parties that may relate to aspects of our business, including the design and manufacture of the Zio Systems used in connection with our Zio Services. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of such third parties or others. Our competitors may assert that our Zio Systems or the methods we employ to deliver our Zio Services are covered by U.S. or foreign patents held by them and we may be required to ~~accept reduced coverage~~settle such allegations in the future. This risk is exacerbated by the fact that there are numerous issued patents and pending patent applications relating to remote cardiac monitoring services and the associated devices. There may be existing patents or patent applications now pending of which we are unaware that may later result in issued patents that our Zio Services, including our Zio Systems, inadvertently infringe. As the number of competitors in the remote cardiac monitoring market grows, the possibility of patent infringement by us or a patent infringement claim against us increases. If we are unable to successfully defend any such claims as they may arise or enter into or extend settlement and license agreements on acceptable terms or at all, our business operations may be harmed.

Any infringement or misappropriation claim could cause us to incur ~~substantially higher~~significant costs, place significant strain on our financial resources, divert management’s attention from our business, and harm our reputation. In addition, if the relevant patents are upheld as valid and enforceable and we are found to infringe such patents, we could be prohibited from using any portion of our Zio Services, including our Zio Systems, that is found to infringe such patent unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain ~~coverage. These factors~~a license on terms acceptable to us, if at all, and we may not be able to redesign our Zio Services, including our Zio Systems, to avoid infringement. We may be unable to maintain or renew licenses on terms acceptable to us, if at all, and we may be prohibited from selling any portion of our Zio Services, including our Zio Systems, that required the technology covered by the relevant licensed patents. Although patent and intellectual property disputes in the healthcare and medical devices area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and would likely include ongoing royalties. Even if we are able to redesign our Zio Services, including our Zio Systems, to avoid an infringement claim, we may not receive FDA approval for such changes in a timely manner or at all.

Further, if we are found to infringe third-party patents, a court could ~~also make it more difficult for~~order us to ~~attract~~pay damages to compensate the patent owner for the infringement, such as a reasonable royalty amount and/or profits lost by the patent owners, along with prejudgment and/or post-judgment interest. Furthermore, if we are found to willfully infringe third-party patents, we could, in addition to other penalties, be required to pay treble damages; and ~~retain qualified executive officers~~if the court finds the case to be exceptional, we may be required to pay attorneys’ fees for the prevailing party. If we are found to infringe third-party copyrights or trademarks or misappropriate third-party trade secrets, based on the intellectual property at issue, a court could order us to pay statutory damages, actual damages, or profits, such as reasonable royalty or lost profits of the owners, unjust enrichment, disgorgement of profits, and/or a reasonable royalty, and ~~members~~the court could potentially award attorneys’ fees or exemplary or enhanced damages. If litigation were to be initiated by intellectual property owners, there could significant legal fees and costs incurred in defending litigation (which may include filing administrative actions to attack the intellectual property) as well as a potential monetary settlement payment to the owners, even if the matter is resolved before going to trial. Moreover, the owners may take an overly aggressive approach and/or include multiple allegations in a single litigation.

Our inability to adequately protect our intellectual property could allow our competitors and others to produce devices and offer services based on our technology, which could substantially impair our ability to compete.

Our success and our ability to compete depend, in part, upon our ability to maintain the proprietary nature of our ~~board~~technologies. We rely on a combination of ~~directors, particularly~~patent, copyright, and trademark law, and trade secrets and nondisclosure agreements to ~~serve~~protect our intellectual property. However, such methods may not be adequate to protect us or permit us to gain or maintain a competitive advantage.

For example, our patent applications may not issue as patents in a form that will be advantageous to us, or at all. Our issued patents, and those that may issue in the future, may be challenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing related devices and services. In addition, there are numerous recent changes to the patent laws and proposed changes to the rules of the USPTO, which may have a significant impact on our ~~audit committee~~ability to protect our technology and ~~compensation committee.~~enforce our intellectual property rights. We also may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors or former or current employees, despite the existence generally of invention assignment and confidentiality agreements and other contractual restrictions we include in contracts with such parties. These agreements may not provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information. There can be no assurance that employees, consultants, vendors, and clients have executed such agreements or have not breached or will not breach their agreements with us, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors. In addition, ~~compliance~~we rely on trademarks, service marks, trade names and brand names, such as our registered trademark “ZIO,” to distinguish our products from the products of our competitors, and have registered or applied to register these trademarks. We cannot assure you that our trademark applications will be approved. Further, during trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in proceedings before the USPTO and in proceedings before comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. Additionally, we are aware of at least one third party that has registered the “IRHYTHM” mark in the European Union in connection with ~~applicable rules~~computer software for controlling and ~~regulations~~managing patient medical information, heart rate monitors, and heart rate monitors to be worn during moderate exercise, among other uses. We and the third party are involved in adversary proceedings before the Trademark Office in the European Union, and those proceedings could impact our ability to obtain a European Union trade mark registration for ~~public companies~~the “IRHYTHM” mark, although we already own many national registrations for IRHYTHM in Europe.

To protect our proprietary rights, we may in the future need to assert claims of infringement against third parties. The outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets, or trademarks is ~~generally~~highly unpredictable, could result in substantial costs and diversion of resources, and could have a material adverse effect on our business, financial condition, and results of operations regardless of the final outcome of such litigation. In the event of an adverse judgment, a court could hold that some or all of our asserted intellectual property rights are not infringed, or are invalid or unenforceable, and could award attorneys’ fees.

Despite our efforts to safeguard our unpatented and unregistered intellectual property rights, we may not succeed in doing so or the steps taken by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third party from copying or otherwise obtaining and using our devices, technology or other information that we regard as proprietary. In addition, third parties may be able to design around our patents. Furthermore, the laws of foreign countries may not protect our proprietary rights to the same extent as the laws of the United States.

Risks Related to Privacy and Security

Cybersecurity risks, including those involving network security breaches and services interruptions, could result in the compromise of confidential data or critical data systems and give rise to potential harm to our patients, remediation and other expenses, expose us to liability under HIPAA, breach notification laws, consumer protection laws, or other common law theories, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise be disruptive to our business and operations.

Cybersecurity threats can come from a variety of sources, ranging in sophistication from an individual hacker to malfeasance by employees, consultants or other service providers to criminal or other unauthorized threat actors, including state-sponsored attacks. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. Cyber threats may be generic, or they may be custom-crafted against our information systems. Cyber incidents can result from deliberate attacks or unintentional events. Over the past several years, cyber-attacks have become more ~~expensive than it is for private companies.~~prevalent and much harder to detect and defend against. These threat actors may be able to penetrate our security measures, breach our information technology systems, misappropriate or compromise confidential and proprietary information of our company, customers, and patients, cause system disruptions and shutdowns, or introduce ransomware, malware, or vulnerabilities into our devices, systems, and networks or those of our partners. Our network and storage applications, as well as those of our contractors, may be vulnerable to cyber-attack, malicious intrusion, malfeasance, loss of data or other significant disruption and may be subject to unauthorized access by hackers, employees, consultants or other service providers. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security or other problems that unexpectedly could interfere with our business operations. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these incidents or techniques, timely discover them, or implement adequate preventative measures.

We have in the past been subject to cyber-attacks and data breaches and expect that we will be subject to additional cyber-attacks in the future and may experience future data breaches. Such incidents may impact the integrity, availability or confidentiality of the sensitive data we maintain or disrupt our information systems, devices or business, including our ability to deliver our services. As a result, cybersecurity, physical security and the continued development and enhancement of ~~disclosure of~~our controls, processes and practices designed to protect our enterprise, information ~~in this filing~~systems and ~~in other filings~~data from attack, damage or unauthorized access remain a priority for us. As cyber threats continue to evolve, we may be required ~~of a public company,~~to expend significant additional resources to continue to modify or enhance our ~~business~~protective measures or to investigate and ~~financial condition is more visible, which could be advantageous~~remediate any cybersecurity vulnerabilities.

We are subject to ~~our competitors~~complex and evolving U.S. and foreign laws and regulations and other ~~third parties~~requirements regarding privacy, data protection, security, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in ~~threatened~~claims, changes to our business practices, monetary penalties, increased cost of operations, or ~~actual litigation. If~~declines in user growth or engagement, or otherwise harm our business.

In the ordinary course of our business, we collect and store sensitive data, such ~~claims~~as our proprietary business information and that of our suppliers, contractors, customers, vendors and others, as well as personal information, including health information, of these parties and of our patients. As a result, we are ~~successful,~~subject to several foreign, federal and state laws and regulations protecting the use, disclosure and confidentiality of certain personal information, namely individually identifiable information (e.g., names, social security numbers, addresses, birth dates), and restricting the use and disclosure of that information. These laws include foreign, federal and state healthcare privacy laws, telehealth laws, breach notification laws and consumer protection laws. These frameworks impose stringent privacy and security standards and potentially significant non-compliance penalties and liability. Foreign data protection, privacy, and related laws and regulations can be more restrictive than those in the United States. For example, data localization laws in some countries generally mandate that certain types of data collected in a particular country be stored and/or processed solely within that country. In addition, both foreign and U.S. legislators and regulators may make legal and regulatory changes, or interpret and apply existing laws, in ways that require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices. These changes or increased costs could negatively impact our business and ~~operating~~ results of operations in material ways.

The secure maintenance, processing and transmission of this sensitive information is critical to our business operations, particularly as we are increasingly dependent on sophisticated information technology systems to operate our business. System failures or outages, including any potential disruptions due to significantly increased global demand on certain cloud-based systems during or as a result of the COVID-19 pandemic, or failures to adequately scale our data platforms and architectures support patient care could compromise our ability to perform these functions in a timely manner, which could harm our ability to conduct business or delay our financial reporting. We have implemented multiple layers of security measures and monitoring to protect the confidentiality, integrity and availability of this data and the systems and devices that store and transmit such data. Despite our security measures and business controls, which undergo routine testing internally and by external parties, our information technology and infrastructure may be vulnerable to attacks by hackers, breaches due to employee, contractor or vendor error, or malfeasance or other disruptions or subject to the inadvertent or intentional unauthorized release of information. Any such occurrence could compromise our data centers and networks and the information stored thereon could be ~~harmed,~~inappropriately accessed, publicly disclosed, lost or stolen. Further, any such access, disclosure or other loss of information could result in legal claims or proceedings, and ~~even~~liability under laws that protect the privacy of personal information and regulatory penalties, increase in operating expenses, incurrence of expenses, including notification and remediation costs, disrupt our operations and the services we provide to our clients or damage our reputation, any of which could adversely affect our profitability, revenue and competitive position.

Cyber-attacks aimed at accessing our devices and services, or related devices and services, and modifying or using them in a way inconsistent with our FDA clearances and approvals, could create risks to users.

Medical devices are increasingly connected to the Internet, hospital networks, and other medical devices to provide features that improve healthcare and increase the ability of healthcare providers to treat patients and of patients to manage their conditions. As such, cyber-attacks aimed at accessing our devices and services, or related devices and services, and modifying or using them in a way inconsistent with our FDA clearances and approvals, may create risks to users and potential exposure to the company.

Risks Related to Our Common Stock

If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the ~~claims are resolved~~research and reports that industry or securities analysts publish about us or our business. We do not have any control over the analysts, or the content and opinions included in their reports. If any of the analysts who cover us issues an adverse or misleading opinion regarding us, our business model, our intellectual property, or our stock performance, or if any third-party preclinical studies and clinical trials involving our Zio Services or our results of operations fail to meet the expectations of analysts, our stock price would likely decline. If one or more of such analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause a decline in our ~~favor, these claims,~~stock price or trading volume.

Our stock price is highly volatile and investing in our stock involves a high degree of risk, which could result in substantial losses for investors.

Historically, the market price of our common stock, like the securities of many other medical service providers that are public companies, has fluctuated. It is likely that our stock price will continue to be volatile in the future. In addition, the trading prices for our common stock and the ~~time~~common stocks of other medical service providers been highly volatile as a result of macroeconomic conditions, including inflation, rising interest rates, and ~~resources necessary to resolve them, could divert~~ the ~~resources~~persisting impacts of the COVID-19 pandemic and the ongoing military conflict between Russia and Ukraine.

The market price of our ~~management~~common stock is influenced by many factors that are beyond our control, including the following:

•securities analyst coverage or lack of coverage of our common stock or changes in their estimates of our financial performance;

•variations in quarterly operating results;

•future sales of our common stock by our stockholders;

•investor perception of us and ~~harm~~ our industry;

•announcements by us or our competitors of significant agreements, acquisitions, or capital commitments or service or product launches or discontinuations;

•changes in market valuation or earnings of our competitors;

•negative business or financial announcements regarding our partners;

•general economic conditions;

•regulatory actions;

•legislation and political conditions;

•global health pandemics, such as the COVID-19 pandemic;

•terrorist acts, acts of war, or periods of widespread civil unrest, including the ongoing military conflict between Russia and Ukraine and actions taken by third parties in response to such conflict; and

•general economic, industry, and market conditions, including inflation, rising interest rates, and foreign currency exchange rates.

Please also refer to the factors described elsewhere in this “Risk Factors” section. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated and disproportionate to the operating ~~results.~~performance of companies in our industry. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.

Securities class action litigation has often been brought against public companies that experience periods of volatility in the market prices of their securities. Securities class action litigation could result in substantial costs and a diversion of our management’s attention and resources.

Anti-takeover effects of our charter documents and Delaware law could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock.

There are provisions in our amended and restated certificate of incorporation and amended and restated bylaws, ~~and~~as well as provisions in the Delaware ~~law, could~~General Corporation Law (“DGCL”), that may discourage, delay, or prevent a change inof control of our company that might otherwise be beneficial to stockholders. These provisions could also make it difficult for stockholders to elect directors who are not nominated by current members of our board of directors or ~~a change~~take other corporate actions, including effecting changes in our management.

~~Our amended and restated certificate of incorporation and bylaws contain provisions that might enable our management to resist a takeover. These provisions include:~~ For example:

•~~a classified~~our board of ~~directors;~~

•~~advance notice requirements applicable to stockholders for matters to be brought before a meeting~~directors may, without stockholder approval, issue shares of ~~stockholders and requirements as to the form and content of a stockholders’ notice;~~

•~~a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation and bylaws;~~preferred stock with special voting or economic rights;

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•~~the right to issue preferred stock without stockholder approval, which could~~our stockholders do not have cumulative voting rights and, therefore, each of our directors can only be ~~used to dilute the stock ownership~~elected by holders of a ~~potential hostile acquirer;~~

•~~allowing stockholders to remove directors only for cause;~~majority of our outstanding common stock;

•a ~~requirement that the authorized number~~special meeting of ~~directors may be changed only by resolution of the board of directors;~~

•allowing all vacancies, including newly created directorships, to be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum, except as otherwise required by law;

•~~a requirement that our~~ stockholders may only ~~take action at annual or special meetings of our stockholders and not~~be called by ~~written consent;~~

•~~limiting the forum to Delaware for certain litigation against us; and~~

•~~limiting the persons that can call special meetings of our stockholders to our board of directors, the chairperson~~a majority of our board of directors, the chairman of our board of directors, our chief executive officer, or ~~the~~our president (in the absence of a chief executive officer).;

~~These provisions might~~•our stockholders may not take action by written consent; and

•we require advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Moreover, Section 203 of the DGCL may discourage, delay, or prevent a change inof control of our ~~company or a change in our management. The existence of these provisions could adversely affect the voting power of~~company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of ~~common stock and limit the price that investors might be willing to pay in the future for shares~~15% or more of our common stock. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.

Our amended and restated certificate of incorporation and bylaws provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another State court in Delaware or the federal district court for the District of Delaware) will be the sole and

The exclusive forum ~~for substantially all disputes between us and~~provision in our ~~stockholders, which could limit our stockholders’ abilities to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.~~

Our amended and restated certificate of incorporation and bylaws provide that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another State court in Delaware or the federal district court for the District of Delaware) is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or to our stockholders, (iii) any action asserting a claim against the company or any director or officer of the company arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or bylaws, or (v) any action asserting a claim against us governed by the internal affairs doctrine, in each such case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction. Our investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Our bylaws further provide that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. The enforceability of similar exclusive federal forum provisions in other companies’ organizational documents has been challenged in legal proceedings, and while the Delaware Supreme Court has ruled that this type of exclusive federal forum provision is facially valid under Delaware law, there is uncertainty as to whether other courts would enforce such provisions. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, or the underwriters of any offering giving rise to such claim, which may discourage lawsuits with respect to such claims.

Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware is the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a claim of breach of fiduciary duty owed by any director, officer, or other employee or agent of the company to us or our stockholders; any action asserting a claim against us arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation, or our amended and restated bylaws; any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation, or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. This exclusive forum provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act.

Notwithstanding the foregoing, our stockholders will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder. Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented to our exclusive forum provisions. The exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such ~~lawsuits against us and our directors, officers and other employees.~~claims. Alternatively, if a court were to find the choice of forum ~~provision~~provisions contained in our amended and restated certificate of incorporation or amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results, and financial ~~condition and operating results.~~condition.

We ~~have not paid dividends in the past and~~ do not ~~expect~~intend to pay dividends infor the ~~future, and, as a result, any return on investment may be limited to the value of our stock.~~foreseeable future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and to finance the operation and expansion of our business, and we do not ~~anticipate paying~~expect to declare or pay any dividends on our capital stock in the foreseeable future. ~~The payment~~As a result, stockholders must rely on sales of ~~dividends will depend~~their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

Risks Related to Our Debt

Increasing our ~~earnings, capital requirements,~~ financial ~~condition, prospects~~leverage could affect our operations and ~~other factors our board~~profitability.

We are party to a Third Amended and Restated Loan and Security Agreement, dated as of ~~directors may deem relevant. In addition, our loan agreement~~October 23, 2018, with Silicon Valley Bank ~~limits~~(as amended by the Second Amendment to Third Amended and Restated Loan and Security Agreement, dated as of March 28, 2022, the “SVB Loan Agreement”), which provides for a (i) a revolving line of credit in the aggregate principal amount of up to $25.0 million and (ii) a term loans facility in the aggregate principal amount of up to $75.0 million. As of March 31, 2023, we had nothing outstanding under the revolving credit line and $35.0 million outstanding under the term loans.

Our leverage ratio, combined with our other financial obligations and contractual commitments, may affect our ability to ~~among~~obtain additional capital resources as well as our operations in several ways, including:

•the possible lack of availability of additional credit;

•the terms on which credit may be available to us could be less attractive, both in the economic terms of the credit and the legal covenants;

•the potential for higher levels of interest expense to service or maintain our outstanding debt;

•the possibility that we are required to incur additional debt in the future to repay our existing indebtedness when it comes due;

•the possibility that our level of indebtedness make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry, and competitive conditions and adverse changes in government regulation;

•limiting our ability to borrow additional amounts to fund acquisitions, for working capital, and for other ~~things, pay dividends or make~~general corporate purposes;

•the possible diversion of capital resources from other ~~distributions or payments on account~~uses; and

•making an acquisition of our ~~common stock,~~company less attractive or more difficult.

Any of these factors could harm our business, results of operations, and financial condition. While we believe we will have the ability to service our obligations under the SVB Loan Agreement and obtain additional financing in the future if and when needed, that will depend upon our results of operations and financial position at the time, the then-current state of the credit and financial markets, and other factors that may be beyond our control. Therefore, we cannot give assurances that sufficient credit will be available on terms that we consider attractive, or at all, if and when necessary or beneficial to us.

Failure to comply with covenants in the SVB Loan Agreement could result in our inability to borrow additional funds and adversely impact our business.

The SVB Loan Agreement imposes numerous financial and other restrictive covenants on our operations, including financial covenants. As of March 31, 2023, we were in material compliance with the covenants imposed by the SVB Loan Agreement. If we violate these or any other covenants under the SVB Loan Agreement or fail to make payments in connection therewith, Silicon Valley Bank could declare an event of default, which would give it the right to terminate its commitment to provide additional loans and declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, Silicon Valley Bank would have the right to proceed against the assets we provided as collateral pursuant to the loan. Any of the foregoing may limit our ability to borrow additional funds and pursue other business opportunities or strategies that we would otherwise consider to be in our best interests.

Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.

Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including the SVB Loan Agreement, depends on our future financial condition and operating performance, which is subject to ~~certain exceptions.~~ economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to satisfy our obligations under the SVB Loan Agreement and any future indebtedness we may incur and to make necessary capital expenditures.

If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing, or obtaining additional equity capital on terms that may be onerous or highly dilutive. These alternative measures may not be successful and may not permit us to meet our scheduled debt servicing obligations. Further, we may need to refinance all or a portion of our debt on or before maturity, and our ability to refinance the SVB Loan Agreement or any future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities on commercially reasonable terms or at all, which could result in a default under the SVB Loan Agreement or any future indebtedness.

General Risk Factors

We may be impacted by domestic and global economic and political conditions, as well as natural disasters, pandemics, and other catastrophic events, which could adversely affect our business, financial condition or results of operations.

Our operations and performance may vary based on worldwide economic and political conditions, which have been adversely impacted by continued global economic uncertainty, political instability, and military hostilities in multiple geographies, including the COVID-19 pandemic, the ongoing military conflict between Russia and Ukraine, domestic and global inflationary trends, rising interest rates, instability in the global banking system, global supply shortages, and a tightening labor market. For example, we have experienced staff shortages at our contact centers as a result of the COVID-19 pandemic and federal, state and local responses thereto. A severe or prolonged economic downturn or period of global political instability could drive hospitals and other healthcare professionals to tighten budgets and curtail spending, which could in turn negatively impact rates at which physicians prescribe our Zio Services. In addition, higher unemployment rates or reductions in employer-provided benefits plans could result in fewer commercially insured patients, resulting in a reduction in our margins and impairing the ability of uninsured patients to make timely payments. A weak or declining economy could also strain our suppliers, possibly resulting in supply delays and disruptions. There is also a risk that one or more of our current service providers, suppliers, or other partners may not survive such difficult economic times, which could directly affect our ability to attain our goals on schedule and on budget. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. We cannot predict the timing, strength, or duration of an economic downturn, instability, or recovery, whether worldwide, in the United States, or within our industry.

In addition, climate-related events, including the increasing frequency of extreme weather events, natural disasters, or other catastrophic events may cause damage or disruption to our operations, international commerce, and the global economy, and could have an adverse effect on our business, operating results, and financial condition. In the event of a natural disaster, including a major earthquake, blizzard, or hurricane, or a catastrophic event such as a fire, power loss, cyberattack, or telecommunications failure, we may be unable to continue our operations and may endure system and service interruptions, reputational harm, delays in development of our Zio Systems and Zio Services, breaches of data security, and loss of critical data, all of which could cause us to experience higher attrition, losses, and additional costs to maintain or resume operations, or otherwise have an adverse effect on our business and operating results. Further, we do not ~~pay dividends,~~maintain insurance sufficient to compensate us for the potentially significant losses that could result from disruptions to our ~~stock~~services. Additionally, all the aforementioned risks may be ~~less valuable because a return on your investment will only occur~~further increased if our ~~stock price appreciates~~or our partners’ disaster recovery plans are inadequate.

Environmental, social, and ~~you sell~~corporate governance (“ESG”) regulations, policies, and provisions may make our ~~common stock thereafter.~~supply chain more complex and may adversely affect our relationships with customers.

There is an increasing focus from certain investors, physicians, patients, employees, and other stakeholders concerning corporate citizenship and sustainability matters and the governance of environmental and social risks. An increasing number of participants in the medical services industry are joining voluntary ESG groups or organizations, such as the Responsible Business Alliance. These ESG provisions and initiatives are subject to change, can be unpredictable, and may be difficult and expensive for us to comply with, given our reliance on our supply chain and the outsourced manufacturing of certain components and sub-assemblies of the Zio Systems used with our Zio Services.

Further, we have in the past and may continue to communicate certain initiatives, including goals, regarding environmental matters, responsible sourcing and social investments. We could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could fail in fully and accurately reporting our progress on such initiatives and goals. In addition, we could be criticized for the scope of such initiatives or goals or perceived as not acting responsibly in connection with these matters.

If we are not effective in addressing ESG matters affecting our business, or setting and meeting relevant ESG goals, our reputation and financial results may suffer.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

We were incorporated in Delaware on September 14, 2006. Our principal executive offices are now located at 699 8th Street, Suite 600, San Francisco, CA 94103, and our telephone number is (415) 632-5700. Our website address is www.iRhythmTech.com. Investors and others should note that we announce material financial information to our investors using SEC filings, press releases, our investor relations website, public conference calls and webcasts. We use these channels as well as social media to communicate with investors, customers and the public about our company, our products and other issues. It is possible that information we post on social media channels could be deemed to be material information. We encourage investors, our customers and others interested in our company to review the information we post on our Facebook page (https://www.facebook.com/iRhythmTechnologies/) and Twitter feed (https://twitter.com/iRhythmTech). The information on, or that may be accessed through, our website and social media channels is not incorporated by reference into this Quarterly Report on Form 10-Q and should not be considered a part of this Quarterly Report on Form 10-Q.

ITEM 6. EXHIBITS

The exhibits listed in the accompanying exhibit index are filed as part of, and incorporated by reference into, this Quarterly Report on Form 10-Q.

6965

EXHIBIT INDEX

Incorporated by Reference

Exhibit
Number

Description

Form

Date

Number

Filed Herewith

Exhibit
Number

Description

Form

Date

Number

Filed Herewith

3.1

Amended and Restated Certificate of Incorporation.

8-K

10/25/16

3.1

Amended and Restated Certificate of Incorporation of the Registrant.

8-K

10/25/16

3.1

3.2

Certificate of Amendment to Amended and Restated Certificate of Incorporation.

8-K

6/23/20

3.1

3.2

Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant.

8-K

6/19/20

3.1

3.3

Amended and Restated Bylaws.

8-K

10/25/16

3.2

3.3

Amended and Restated Bylaws of the Registrant.

8-K

10/25/16

3.2

3.4

Certificate of Amendment to the Amended and Restated Bylaws.

8-K

8/14/20

3.1

3.4

Certificate of Amendment to the Amended and Restated Bylaws of the Registrant.

8-K

8/14/20

3.1

10.1

Resignation, Release and Consulting Agreement, dated March 10, 2023, by and between the Registrant and Douglas Devine

31.1

Certification of Chief Executive Officer required by Securities Exchange Act Rules 13a-14(a) and 15d-14(a).

31.1

Certification of Chief Executive Officer required by Securities Exchange Act Rules 13a-14(a) and 15d-14(a).

31.2

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a)

31.2

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a)

32.1*

Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350.

32.1*

Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350.

101.INS

XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.INS

XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

XBRL Taxonomy Extension Schema Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* The certifications filed as Exhibits 32.1 are not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the Company under the Securities Exchange Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof irrespective of any general incorporation by reference language contained in any such filing, except to the extent that the registrant specifically incorporates it by reference.

7066

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	iRhythm Technologies, Inc.

Date: May ~~6, 2022~~4, 2023	By:	/s/ Quentin S. Blackford
		Quentin S. Blackford President and Chief Executive Officer (Principal Executive Officer)



Date: May ~~6, 2022~~4, 2023	By:	/s/ ~~Douglas J. Devine~~Brice A. Bobzien
		~~Douglas J. Devine~~Brice A. Bobzien Chief Financial ~~Officer and Chief Operating~~ Officer (Principal Financial Officer)

7167


	Common Stock							Accumulated Other		Total
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit		Comprehensive Income		Stockholders' Equity
Balances at December 31, 2020	29,019,350	$	27	$	646,258	$	(304,684)	$	11	$	341,612
Issuance of common stock in connection with employee equity incentive plans, net	268,399	—		1,576		—		—		1,576
Tax withholding upon vesting of restricted stock awards	—	—		(25,105)		—		—		(25,105)
Stock-based compensation expense	—	—		19,267		—		—		19,267
Net loss	—	—		—		(27,779)		—		(27,779)
Net change in unrealized gain on investments	—	—		—		—		1		1
Balances at March 31, 2021	29,287,749	$	27	$	641,996	$	(332,463)	$	12	$	309,572


	Three Months Ended March 31, 2022		Year Ended December 31, 2021		Three Months Ended March 31, 2021
Balance, beginning of period	$	14,012	$	12,711	$	12,711
Add: provision for doubtful accounts	4,413		9,615		3,095

Less: write-offs, net of recoveries and other adjustments	(60)		(8,314)		(3,046)
Balance, end of period	$	18,365	$	14,012	$	12,760


	March 31, 2022		December 31, 2021
Due within one year	$	156,587	$	221,706
Due after one year through three years	—		—
Total cash equivalents and available-for-sale investments	$	156,587	$	221,706


Period Ended March 31:
2022	$	6,550
2023	13,995
2024	14,265
2025	14,681
2026	15,108
Thereafter	75,390
Total lease payments	139,989
Less: imputed interest	(42,144)
Total lease liabilities	$	97,845